Large PSBs’ shares dip as recap fails to lift mood
Shares of large public sector banks (PSBs) fellon Thursday, with some investor disappointment at the central government’ s ~880- billion capital in fusion plan. Shares of SB I and Union Bank of India fell five percent each. Punjab National Bank fell the most at 7.1 percent; Bank of Baroda dropped six percent. In contrast, smaller PSBs, including UCO Bank and Punjab& SindBank, ended with gain.
Shares of large public sector banks (PSBs) fell on Thursday, with some investor disappointment at the central government’s ~880-billion capital infusion plan.
Shares of State Bank of India (SBI) and Union Bank of India fell five per cent each. Punjab National Bank (PNB) fell the most at 7.1 per cent; Bank of Baroda (BoB) dipped six per cent.
A day earlier, shares of all state-owned banks had rallied ahead of the recapitalisation (recap) announcement.
The Centre on Wednesday announced the much-awaited plan under which it would invest a total of ~800 billion across 21 PSBs, through recap bonds. This is in addition to the ~80 billion it had infused in some. Separately, banks have raised ~120 billion by way of qualified institutional placement and by divesting holdings in non-core businesses. All this together would result in 50 per cent of the total planned recap of ~2.1 trillion.
“We believe this is overall positive for the sector but not exactly in tune with the Street’s expectations,” was the comment of Jefferies, the global investment bank and institutional securities entity. “This is in contrast to market expectations of bigger or healthier banks receiving a higher share of capital.”
“One concern among investors was that bulk of the capital could go to larger banks and that smaller banks (which are in significant need of capital) might get less capital. However, the government has allocated most of the capital to weaker banks,” said Morgan Stanley in a note. The brokerage said smaller banks IDBI, UCO, Dena and Bank of Maharashtra would see an increase of 380- 590 basis points (bps) in their common equity tier-1 (CET1) ratio. SBI will see its CET1 ratio improve by 40 bps.
The Nifty PSU Bank index on Thursday fell 5.2 per cent to 3,757.7. The Nifty Private Bank index rose one per cent, while the Nifty50 ended 0.15 per cent lower. In October, when the Centre had outlined the recap plan, the Nifty PSU Bank index had surged 30 per cent in a single day to 4,010.
Many analysts said the higher allotment for weaker banks was warranted. Most are grappling with bad loans and were in dire need of higher capital due to the new Ind-As accounting norms.
“The poor performers under the RBI’s prompt corrective action (PCA) have received 60 per cent of the allotment. We believe this step was warranted by the potentially high haircuts on NCLT (National Company Law Tribunal) cases, which would have brought capital adequacy below the regulatory threshold for these banks and render their transition to Ind-As nearly impossible,” said JM Financials in a note.
The brokerage said the first tranche of the recap announcement would cover 38 per cent of the projected capital shortfall for the top four PSBs in FY19 — SBI, PNB, BoB and Canara Bank.
Brokerages said further rounds of capital infusion should provide for the shortfall and help banks meet the provisioning requirements.
Despite higher allotment to weaker banks, analysts still favour larger lenders. “Small banks could do well in the near term, given the quantum of capital; however, returning to normalised return on equity will probably take a long time. Our preferred stocks among corporate lenders remain the bigger names, as their profitability will likely return much quicker,” said Morgan Stanley.