PROVISIONING RATIO TO IMPROVE 1,800-1,900 BASIS POINTS
The government’s ~2.11-lakhcrore plan to recapitalise public sector banks (PSBs) has been well received by the markets, as it is seen as a bold move to fix the banking sector’s problems.
Most PSBs have been in a fix due to rising non-performing assets (NPAs) and the lack of capital to provide for these NPAs as well as push loan growth. Likely implementation of the Indian Accounting Standards (IndAS) from April 1, 2018, would also require an aggressive increase in provisioning.
While the move to shore up PSBs’ capital is a welcome step and seen as a game-changer, it has many implications. Brokerages have put out their estimates to indicate the gains and implications for PSBs as a whole as well as for individual lenders.
If banks use a large chunk of the infused capital to provide for the bad loans, each PSB’s provisioning coverage ratio (PCR) is seen increasing by 1,800-1,900 basis points, says Motilal Oswal Securities.
“Of the total allocation, we believe that ~75,000-80,000 crore will go towards meeting the Basel-III capital requirements and supporting business growth, while the remaining ~1.3 lakh crore can be utilised to make higher provisions (for bad loans),” it says.
Estimates by rating agencies and analysts peg the capital requirement of PSBs for providing for NPAs at ~2.50 lakh crore. A Kotak Institutional Equities report pegs the combined stressed assets of 21 PSBs at ~10.5 lakh crore, and net NPAs at ~4.17 lakh crore.
Although the gross provisions required (at 60 per cent; and assuming 40 per cent recovery in loans) towards NPAs for the 21 PSBs is pegged at over ~3.14 lakh crore and Basel-III capital needs at ~80,000 crore, Kotak expects these banks to generate ~2.23 lakh crore in pre-provisioning operating profit over the next two years. The net capital required, thus, is ~1.8 lakh crore.
Stressed assets include gross NPAs, restructured loans, and other dispensations such as loans under SDR (strategic debt restructuring), S4A, and 5:25 schemes.
At a broader level, the PCR for government banks is expected to rise from 43 per cent to 62 per cent, equity to dilute to the extent of 6 per cent to 57 per cent, and the government’s stake seen rising between 6 per cent and 29 per cent as funds are infused (both through bonds and direct equity), estimates Motilal Oswal.
As a result of the fund infusion, the book value of these banks will also change. A lot, though, will depend on the price and quantum of equity dilution. Analysts say smaller PSBs are at risk of significant dilution. Based on its theoretical exercise and estimates of capital infusion, Kotak’s analysts say the average book value per share dilution will be 20-40 per cent, even if it is assumed that the capital infusion is at a 20 per cent premium to the current market price (October 24).
It also estimates the government’s stake to increase to 80-90 per cent in many cases. This would then be higher than the 75 per cent as mandated under listing norms. A clearer picture would, however, emerge only after the finer details are announced.