Our channel checks with both Reserve Bank of India (RBI) and rating agencies and also our internal calculations suggest that Indian banks would have to raise at least $30 billion (Rs 1.65 trillion) of equity capital over the next four-five years, driven by growth requirements and Basel-III implementation.
Our conversation with rating agency Fitch suggested that the agency expects close to $32 billion equity capital raising to be done by FY15, with government-owned banks accounting for close to 84% of this figure. The State Bank of India (SBI) group alone is expected to raise close to $14 billion of equity capital.
Fitch’s assumptions are slightly on the higher side, in our view, as it is assuming a minimum core tier-I ratio of 9% and loan growth of 21–22% for the sector.
Though RBI didn’t quote an estimate, it did guide that capital requirements for growth as well as transitioning towards Basel-III are very high. RBI is mindful of the pressure that is likely to put on government finances, especially when it is walking a tightrope with respect to its fiscal state.
RBI was categorical that capital requirements are unlikely to be relaxed and the government either has to pare down its stake in government-owned banks (considering that it has 58%-plus stake now in many government-owned banks) or think of a holding-company structure to manage the banks’ capital needs.
SBI’s management had internally estimated that for 20% loan growth till FY19, the group would require close to about Rs 980 billion, with capital-raising largely kicking in post FY15, when they would have to start keeping a capital conservation buffer. The leverage ratio today is 3.7% and if it has to be increased to the prescribed 4.5% immediately, they would require Rs 18 billion.
We believe that, structurally, leverage ratios will come down from 17 times to closer to 14-15 times and that could result in 200-300 basis points (bps) compression in return on equity.
Basel-III implementation would kick in from 1 January 2013 and most government-owned banks did get a decent amount of capital from the government and Life Insurance Corp. of India in FY12. Hence, they are well capitalised for the time being. We expect large capital raising to happen from the second half od FY14. Among private sector banks, we expect Axis Bank Ltd and YES Bank Ltd to tap the equity markets first. ICICI Bank Ltd and Kotak Mahindra Bank Ltd are comfortably placed, in our view, with high levels of tier-I and we don’t envisage any equity dilution till FY15 for them.
We maintain our cautious stance on banks and would prefer HDFC Bank Ltd and ICICI Bank at current levels. The risk of equity dilution is less in them and earnings growth is expected to be strong.
Graphic by Sandeep Bhatnagar/Mint
Edited excerpts from a report by Macquarie Equities Research. Send your comments at firstname.lastname@example.org
Also See | What to Expect (PDF)