State Bank may need to raise 30,000 cr in next two years

State Bank may need to raise 30,000 cr in next two years

Mumbai: State Bank of India (SBI), India’s largest lender by assets, plans to mop up as much as 30,000 crore in equities in the next two years to support business growth.

This can be done through a slew of instruments, including a follow-on public offer, sale of shares to institutional investors as well as a rights issue, a top official said.

The lender, which has a loan book of at least 7.5 trillion, is currently in talks with the government for its proposed 20,000 crore rights issue, but this may not be enough, said Diwakar Gupta, managing director and chief financial officer.

“We plan to raise, in fact, a little more than 20,000 crore. Ideally it should be close to 30,000 crore for (next) two years in which the government has to put in 16,000-17,000 crore," Gupta said.

The bank has multiple options available to raise capital. “It can come through preferential allotment plus qualified institutional placement, a rights issue, or a follow-on (public) offer or a combination of these," Gupta said.

Indian banks need to follow a capital adequacy ratio of 9%. This means that for every 100 worth of loan, they need 9 capital. A 30,000 crore capital raising will roughly help SBI to expand its loan book by 3.3 trillion.

“There is nothing surprising in the move," Saurabh Tripathi, partner at Boston Consulting Group (BCG), said. “Given its size and business, they have to find capital."

Another analyst with a foreign brokerage said a bank of SBI’s size needs higher capital to create certain buffer.

“Even though the economy is slowing, SBI will need capital in the coming years. The regulator may have also informed the bank about certain additional capital requirement. So there could be pressure on capital raising," said the analyst who did not want to be named because of his company’s media policy.

Capital raising for the bank has become imminent because it shaved off its capital by about 2% in fiscal 2011 after deducting about 7,500 crore from its reserves to provide towards pensions.

“Capital raising is important for SBI now given that they had a 10% deterioration in their tier I capital in the fourth quarter. Given the current pace of business growth, they will be requiring capital to expand their loan book. This leaves no other option for the bank, but to raise capital, also to maintain a healthy capital adequacy," Santosh Singh, an analyst with Espirito Santo Securities said.

Tripathi of BCG, however, cautioned that SBI has to check its non-performing assets and employee productivity, besides arresting a slide in their profitability.

SBI has been showing a decline in some of the critical financial parameters closely watched by the investor community.

For instance, its return on assets fell to 0.71% in March 2011 from 0.88% and return on equity fell to 12.84% from 14.04%, according to an analysts’ presentation of the bank after its annual earnings.

Both the government, which owns 59% stake in the bank, and the bank do not prefer to dilute the government holding in the company, Gupta said.

“It is family silver. Why should we not have the leeway to have government unlock the value of its shareholding at a more opportune time? The government also does not want to dilute and we are absolutely fine with that." Gupta said.

Last time SBI went for a rights issue was in 2008, when it raised 16,736 crore. In the past, the government was forthcoming in infusing capital in the lender that has huge capital demand on account of rapid business growth.

Last year, SBI added around 1.3 trillion to its loan book.

“We possibly added a whole bank in a year. So if that is the kind of business we add, we will definitely need capital. We will survive 2012, but definitely need money in 2013," Gupta said.

According to analysts, SBI has been struggling to maintain its market share and given the competition in the Indian banking sector, it will have to revise its strategies to prevent further erosion in market share. Gupta, however, said the bank is not concerned and has succeeded in preventing a slide in its market share.

“We were 15% (of the market) in 2006 and we (are) 16% in 2010-11. We have arrested the slide," Gupta said.

As on March 2011, its market share in total advances was 16.40%, up against 16.26% a year ago and 15.99% a year before that. In deposits, the bank’s share is 16.40%, marginally up from 2010 level of 16.29%, but significantly down from March 2009 level of 17.70%.

This was because in fiscal 2009, after the collapse of Lehman Brothers Holdings Inc. that plunged the world into an unprecedented credit crunch, SBI raised its deposit rates substantially to mobilize money. Following this, it was saddled with high cost money that could not be profitably deployed.

SBI has aggressively hiked its lending rates in this year. Its base rate is now 9.50%, up from 8% in January and 7.5% in July 2010 when base rate was introduced.

It has also increased its deposit rates sharply, as much as 2.25 percentage points in short-term maturity basket.

“State Bank does not want to raise rates unless it becomes absolutely necessary. If there is a significant repricing in deposits, we will have no option but to raise (loan) rates. But, as of now, we are aware that the rates are already high and if we can help we should not raise them," Gupta said.

In the past one year, SBI stock has risen only 0.6%, underperforming the Bankex, the index of the banking stock, which has risen 12.21%. The largest private sector lender ICICI Bank Ltd has risen 17.4%.

It raised around 5,000 crore through the issue of retail bond to investors last year.

According to Gupta, the bank is unlikely to float another round of retail bond issue immediately. “Rates are very high today. We should wait for some moderation before going (in) for an issue. Otherwise, you are locking into a 10% rate for 10 years. That’s very expensive."

The lender, which had raised at least $4 billion (Rs 17,760 crore today) through the issue of medium-term notes (MTN) from overseas markets, will raise another $5 billion through MTN this year.