PSBs trade mixed after Government unveils bank recap plan

State Bank of India, Punjab National Bank, Indian Bank and Bank of Baroda were trading lower by 3% on NSE at 09:36 AM

Shares of frontline public sector banks (PSBs) were down up to 5% on the National Stock Exchange (NSE) in early morning trade on profit booking after the government unveiled recapitalisation (recap) plan.

The government has announced details of the Rs 2.1tn recapitalisation plan approved in October, 2017 for 20 public sector banks (PSB), with over Rs 881 billion to be infused in FY18 itself, of which Rs 800 billion is to be raised via “recap bonds”.

At 09:36 AM; State Bank of India (SBI) Punjab National Bank (PNB), Indian Bank and Bank of Baroda (BOB) were trading lower by 3% each, while Syndicate Bank, Allahabad Bank, Oriental Bank of Commerce, Union Bank of India and Canara Bank , all from the Nifty PSU Bank index, were down 1% to 2% on NSE. However, IDBI Bank and Bank of India were trading higher 2% each.

Nifty PSU Bank index, the largest loser among sectoral indices, was down 2.2% at 3,877, after hitting an intra-day low of 3,837. On comparision, Nifty50 and Nifty Bank indices down 0.17%, while Nifty Private Bank index up 0.17% on Thursday.

In past seven trading sessions, Nifty PSU Bank index had outperformed the market by surging 12%, against 5.5% rise in Nifty Bank and 3.6% gain in the benchmark Nifty50 index till Wednesday.

The new pan has laid out rigorous guidelines for banks to be eligible for recapitalization funds. The government has allocated Rs 881 billion for bank recapitalization (predominantly through recap bonds) of which Rs 523 billion will be allocated to 11 PSU banks that are currently under Prompt Corrective Action (PCA). Banks under PCA are those with very high NPAS and low levels of capital adequacy.

“The government has also given a tacit assurance that not a single state run bank would be allowed to fail. As part of the recap deal banks will also have to identify noncore areas for hiving off, as well as overseas branches to be shut down. The big takeaway is that the recapitalization package will actually create Rs 5 trillion of incremental lending capacity, which can catalyze the revival of the capital investment cycle in India,” Angel Broking said in a client note.

The package would be perceived as a positive move for large PSBs like SBI, BOB, PNB and Canara Bank, as it will help shore up their balance sheets and align their capital adequacy with Basel-3 norms. The government expects credit offtake through all state-owned banks to reach around Rs 5 trillion, which would help drive FY19 credit growth, according to analysts at BOB Capital Markets.

However, we expect the equity infusion to be below book value for smaller PSBs, as most of these banks are trading between 0.4 times and 0.9 times FY19E P/BV (price to book value). Thus, such a capital infusion could be detrimental for minority shareholders. We expect the sustainability of any ensuing PSB valuation re-rating to depend on improved business growth, margin expansion and stressed asset resolution, the brokerage firm said in sector update.

COMPANY	LATEST	PREV CLOSE	LOSS/GAIN (%)
INDIAN BANK	388.55	403.10	-3.6
BANK OF BARODA	173.40	178.35	-2.8
PUNJAB NATL.BANK	189.25	194.65	-2.8
ST BK OF INDIA	322.55	329.90	-2.2
SYNDICATE BANK	80.70	82.30	-1.9
VIJAYA BANK	68.05	69.15	-1.6
ALLAHABAD BANK	72.10	73.10	-1.4
ORIENTAL BANK	127.85	129.45	-1.2
UNION BANK (I)	147.15	148.90	-1.2
ANDHRA BANK	58.25	58.80	-0.9
CANARA BANK	376.90	379.25	-0.6
J & K BANK	76.50	76.95	-0.6
CORPORATION BANK	40.10	40.05	0.1
DENA BANK	26.95	26.60	1.3
PUN. & SIND BANK	47.75	47.10	1.4
CENTRAL BANK	75.75	74.60	1.5
I O B	23.70	23.30	1.7
UNITED BANK (I)	18.25	17.90	2.0
BANK OF INDIA	176.15	172.45	2.2
IDBI BANK	67.60	65.35	3.4
UCO BANK	33.45	31.55	6.0