Capital infusion into PSBs: Preparatory work for privatisation starts

Buoyant market may gradually reduce PSBs' dependence on government for funds

Stocks of Central Bank of India, Indian Overseas Bank (IOB), Bank of India (BOI), and UCO Bank gained 3-6 per cent in Thursday’s trade, reacting to the government’s Rs 14,500-crore capital infusion proposal as this could help them exit the prompt corrective action (PCA) framework. This money, received by the banks on Wednesday, is through zero-coupon bonds (ZCBs).

Interestingly, in the case of Bank of Maharashtra, when the government infused Rs 5,500 crore of capital as ZCBs, media reports suggested that the Reserve Bank of India (RBI) wasn’t comfortable with this approach of funding, considering the nature of the instrument used. ZCBs are debt instruments that do not pay interest but trade at a deep discount, thereby resulting in a profit at maturity as the bonds are redeemed at full face value. Yet, if the government has opted for this route, it perhaps kept in mind the valuations of these entities, which currently trade far below their book value (0.3-0.4x their 12-month trailing price-to-book). Direct equity infusion would have been further value depletive.

However, India Ratings and Research feels the government’s move may not lend support to the equity base of the banks. “These long-tenor securities would be factored at par value rather than the discounted value in the banks’ balance sheet,” they note. The agency believes the intrinsic net worth of these instruments could be lower by more than 50 per cent than similar maturity government papers in the market.

Nevertheless, it will be known soon if the capital infusion helps IOB, Central Bank, and UCO better their returns on assets (RoAs) — a factor that will decide their valuations ahead of the proposed privatisation plan. While these banks have a net non-performing assets (NPA) ratio well below the mandated six per cent mark, their RoA hadn’t turned convincingly positive till the December quarter and that could be a deciding factor for RBI to allow their exit from PCA. In any case, Siddharth Purohit of SMC Capital feels, with this round of capital infusion, these public sector banks may get closer to the government’s privatisation agenda.

While there is speculation around the likely candidates, Purohit says the infusion not further eroding the value of these banks is positive. “While this may not be the last time the government infuses capital into banks, given the kind of growing investor interest, they would be in a better position to tap capital in future,” he explains. Among PSBs, while Canara Bank had a successful qualified institutional placement (QIP), Punjab National Bank’s was a damp squib. Indian Bank and Union Bank are among those waiting to hit the market. Their issuances will reveal the real market interest.