Uphill climb for public sector banks in raising equity

Eight PSBs have received board approvals to raise fresh capital aggregating Rs 35,000 crore

A number of public sector banks (PSBs) are lining up to raise fresh equity capital from the market in the coming months. Convincing investors to put money, however, may prove to be an uphill task, especially for the smaller banks.

Eight public sector banks — including the likes of State Bank of India (SBI) and Bank of India (BoI) — have taken board approvals to raise fresh capital aggregating over Rs 35,000 crore, while another five have informed stock exchanges that their boards will consider capital raisings in the coming months. 

SBI’s board, for instance, has given its nod to raise up to Rs 15,000 crore in equity capital this financial year.

Just like in early 2016, investor appetite for fresh equity issuances, however, is likely to be lukewarm, say experts. “It will not be easy for banks to raise money. While market conditions and liquidity are better than last year, investors will only be willing to put money if they see a credible turnaround plan for the banks in terms of capital infusion, bad loan resolution and management appointment,” said Pankaj Agarwal, banking analyst at Ambit Capital. 

According to Morgan Stanley, while the large banks would be able to raise capital given relatively better fundamentals, the smaller ones might struggle. “Fundamentals (both balance sheet and earnings) are very weak. The amounts they are looking to raise is high at as much as 90 per cent of market cap. With all banks looking to raise capital, demand from investors may be muted - unless banks make this offering to government/government-backed entities,” said Morgan Stanley analysts led by Sumeet Kariwala and Subramanian Iyer, in a note last week. 

The banks' under-capitalisation continues to be a drag. The government allocated Rs 22,900 crore in fiscal 2017 to 13 PSBs, 75 per cent of which was infused immediately. The fiscal 2018 Budget has allocated Rs 10,000 crore capital support to PSBs.

The requirement for capital becomes crucial as banks start taking haircuts on their bad loans in the next few months, which will mean that their capital and capital adequacy ratio will take a hit.

On the other hand, consultancy firm McKinsey estimates the capital requirement of the entire banking system at Rs 1.85-2.75 lakh crore till FY22 to manage their business.

According to Crisil, capital infusion planned by the government is inadequate, given the high capital requirement to meet Basel-III norms, and the relentless rise in gross non-performing assets (GNPAs). “The Strategic Debt Restructuring scheme is facing hurdles in implementation such as disagreement on the terms of conversion of debt to equity between banks and companies, and lack of capacity of banks to get a new management to run a company. The Banks Board Bureau has not been empowered to change the management at public sector banks,” observed Crisil. 

Experts believe that only the likes of SBI, Punjab National Bank (PNB) or Bank of Baroda may be able to raise capital. “Leaders among public sector banks will be in a position to raise money as there is enough appetite for these among investors,” said V Jayasankar, senior executive director and head – ECM, Kotak Investment Banking.   

The preferred mode of raising capital will remain qualified institutional placements (QIPs) followed by rights issue. “The advantage with the second mode is that even minority shareholders can participate equally which will be the right thing for the companies quoting below book value,” said Alpesh Mehta, deputy head of research, institutional equities, Motilal Oswal Securities.

QIPs of PSBs amounting to Rs 20,000-25,000 crore had hit a wall in 2016 as a steep correction in their share prices and the bad debt overhang spooked investors. SBI, IDBI Bank, PNB, Central Bank of India, Indian Overseas Bank, Union Bank of India, Canara Bank and Oriental Bank of Commerce were among those that had put QIP plans on hold last year.

As a result, some banks may wait it out till the appetite improves before firming up their plans. P S Jayakumar, managing director and chief executive officer, Bank of Baroda, said “The bank has headroom to raise up to Rs 6,500 crore in capital. We will review performance for the second and third quarter of the current financial year before arriving at a final decision.”