Sector Update |
Update | Financials
25 October 2017
Financials - Banks
Bank Of Baroda
Bank Of India
Central Bank Of
IDBI Bank Ltd.
Punjab & Sind
State Bank Of
Union Bank Of
United Bank of
Government announces big bang capital infusion plan for PSBs
Too big to fail!
In an unexpected development (more because of the quantum) the government has
announced a PSU Bank recapitalization plan amounting to INR2.1t (48% of PSU
banks’ current market cap). This will comprise - (i) front-ended capital infusion of
INR1.35t to be funded via recapitalization bonds and (ii) INR760b of capital infusion
from budgetary support and proposed capital raisings by the PSU banks, of which
INR180b will be infused this year as part of the ‘Indradhanush’ plan.
The government will allocate funds to the banks after analyzing their performance,
size and capital requirements. While the details on the recapitalization bonds are yet
to be announced, we believe that this move will help address the perennial capital
constraints facing the PSU banks and also enable these banks to make the required
provisions, thereby expediting the NPL resolution process.
Of the total allocation of INR2.1t, we believe that INR750-800b will go toward
meeting the Basel III capital requirements and supporting business growth, while the
remaining ~INR1.3t can be utilized to make higher provisions. The government intent
to clean up the banks and kick-start the lending process appears very strong, and
thus, we believe that the recapitalization/clean-up initiative would remain a
recurring theme over the next few quarters. Against this backdrop, we turn
constructive on PSU banks, and will soon review our estimates/target prices.
We believe that the banks that are short on capital and have higher quantum of bad
loans stand to benefit more. We reiterate our Buy rating on PNB, SBIN and BOB.
Balance sheet clean-up to account for higher share of infusion at ~60%
We have assessed the individual bank's capital requirement in order to comply
with Basel-III regulations as we believe this is going to be foremost important. We
have then attempted to model the remaining capital allocation to respective banks
taking into account their outstanding bad loans. We believe that the requirement
towards Basel-III compliance will be relatively lower while balance sheet clean-up
will consume ~60% of proposed allocation.
Provisioning coverage to improve ~1900bp to 62%
On the basis of our modelled capital allocation (described above) we estimate that
provisioning coverage ratio of the banks will improve sharply as they begin
cleansing their bad loans. We thus estimate coverage ratio for PSU banks to
improve to an average level of 62% vs 43% currently. This will have a positive
impact on ABVs and we estimate FY18E/19E ABVs to improve by 13%/10%
respectively on completion of this exercise.
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 3982 5540 |
(Anirvan.Sarkar@MotilalOswal.com); +91 22 3982 5505
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
| Piran Engineer
(Piran.Engineer@MotilalOswal.com); +91 22 3980 4393
25 October 2017
are advised to refer through important disclosures made at the last page of the Research Report.
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