Mumbai: The largest names in India’s banking industry, State Bank of India, ICICI Bank Ltd and HDFC Bank Ltd, are all looking at equity markets to meet their capital requirement and seeking to mop up a whopping Rs26,000 crore.
Can offerings from India’s biggest banks go through successfully?
You bet, say market experts.
“One needs to see the quality of papers. There is huge appetite for quality bank issues and the market can certainly absorb them,” insists Paresh Sukthankar, head, credit and market risk at HDFC Bank.
In fact, the appetite for the financial sector is so strong that more private- and public-sector banks are lining up similar public offerings to meet their capital needs to cater for increased credit growth and capital requirements ahead of the implementation of Basel-II, the international banking guidelines that require banks reduce their risk exposure.
The total money to be raised by Indian banks will be more than $6 billion (Rs24,600 crore) as the associate banks of State Bank of India, too, are set to enter the capital market. Although they haven’t formally announced their plans to tap the market, people close to State Bank said investment bankers have started making presentations to the associate banks. The government this week amended the law paving the path for these banks’ capital issues. Interest in banks’ stocks has remained buoyant despite five interest-rate hikes and two hikes in the minimum requirement for the capital to be set aside by banks.
The Bombay Stock Exchange’s bank index is up 22.52% this fiscal year, through Thursday. ICICI Bank is up 16.31%, State Bank of India is 42.77% up and HDFC Bank is up 14.93%, in the same period.
All of this suggests that the market could well lap up the three offerings and perhaps even the additional ones.
“These are the biggest banks looking at global investors to raise capital,” notes Prithvi Haldea, managing director of Primedatabase, a markets data company. “Given the growth potential of these banks, we can be reasonably sure that the appetite for such issues will be great.”
Sarika Lodha, banking analyst at Angel Broking, a Mumbai brokerage firm, is betting that not only will these issues go through successfully, but they could lead to an increased interest in the banking and financial sector. “We could see a shift towards banking stocks.”
Banking experts say the amount of capital required could be as high as Rs1.5 lakh crore, if one considers the amount required to meet the rapid growth in bank credit, which stood at 35% in the last two financial years. By March, banks will require Rs50,000 crore to meet the stiff capital requirements.
Basel-II rules require banks to adjust their capital requirements according to the risks inherent in each bank’s portfolio of loans and investments. It is little wonder then that UTI Bank and others such as Punjab National Bank, Bank of Baroda, Bank of India and Union Bank of India are also expected to announce capital- raising plans shortly.
According to industry analysts, the banking system could witness 20-25% growth in credit during the current fiscal year. “From the banks’ point of view, there is a need for capital because credit growth is expected to be around 25% for the next year,” said Krishnan Sitaraman, head, fund services and fixed income at Crisil Ltd, a credit rating agency. “Also, Basel-II norms will require banks with international operations to be compliant by March 2008 and all the banks with issues lined up have?international?operations.”
Collectively, these will be the largest offerings by banks in a year, though not all will come in the domestic market.
Some of the offerings could have a mix of debt and equity and could be listed on foreign exchanges. But even internationally, there has been a strong demand for bank offerings. Last year, the Industrial Bank of China and China Construction Bank raised a total of $30 billion for their issues. Bandi Ram Prasad, a consultant at Dun & Bradstreet, a financial services research firm, says that growth is the biggest factor behind the demand for these issues.
“These banks have great potential in the long term; that will attract international investors,” he says. “We are close to China in our growth prospects. Last year’s Chinese bank issues were among the largest and yet they were many times oversubscribed. I do not see any reason why Indian banks won’t see the same response.”
“Indian corporations have raised substantially large amounts between 2004 and 2006,” adds Ananda Bhowmick, a senior director at Fitch Ratings. “From $2.2 billion in 2004, the amount raised has gone up to $6.5 billion in 2006. The private banks will find it easier to raise money in the markets, given the fact that the state-run banks have constraints of government stake up to 51%.”