Shares of large PSU banks fall as recapitalisation plan disappoints
Mumbai: Shares of state-run banks plunged on Thursday as investors showed their disappointment with the government’s plan to infuse Rs88,000 crore as part of its recapitalisation package for lenders.
The Nifty PSU Bank index fell 5.24%, while benchmark indices Nifty and Sensex declined marginally. Among state-run banks, Indian Bank, Bank of Baroda, Union Bank of India, State Bank of India, and Punjab National Bank lost 5-7% during the day.
Analysts said that the bank-wise split of capital infusion belied expectations, leading to heavy selling of PSU bank stocks.
While the capital infusion is overall positive for the banking sector, it is not exactly in tune with expectations, Jefferies India said. Out of the total money allocated, weaker banks that are under Reserve Bank of India’s prompt corrective action will receive Rs52,300 crore while the more healthier ones will receive the balance which is in contrast with market expectations of bigger and healthier banks receiving a higher share of capital.
“While this may be beneficial for smaller banks which perhaps rarely undertook appropriate due diligence, we worry if such a measure increases sector-specific concentration risks among larger banks, which is essentially one of the precursors of the current asset quality cycle,” the research firm said in a 25 January note.
According to Kotak Institutional Equities, there was a fair amount of speculation since the capital announcement that the government could look to change the functioning of banks in a serious manner when it announced the modalities of capital infusion and beneficiaries. But there was nothing meaningful in the presentation that was released on Wednesday.
“There seems to be only one quantitative restriction where banks have been asked to have at least 10% exposure in any consortium loans. Most of the other conditions laid are a lot more qualitative in nature or a shift in focus towards retail, agriculture or MSME segments,” it said in a note on 25 January.
Kotak Institutional Equities expects the announced capital programme to reduce the net non-performing loans (NPLs) by 30% for these banks, which can minimize the difference between reported and adjusted book values.
Though Morgan Stanley expects small banks to do well in the near term given the quantum of capital, yet it feels a return to normalised return on equity (RoE) will take a long time. “This is a good allocation of capital, in our view, as it provides higher amounts of capital to banks with weaker capital and profitability. This should allow these banks to make proper provisions on their bad loans, helping to clear system asset quality. The allocation is skewed towards weaker banks and should help them meet a material portion of uncovered NPLs,” it added.
Measures from the Indian government to boost corporate governance in public sector banks aren’t enough to address their fundamental weaknesses and bring about structural improvements, Moody’s said in a report. “We currently do not believe these reforms are meaningful enough to address the structural corporate governance issues facing these entities,” said Srikanth Vadlamani, vice president and senior credit officer at Moody’s Investors Service.
Fitch Ratings, which has a negative outlook on Indian banks, said that the government’s package should help in part to mitigate the risks that Indian state-run banks face on account of weak asset quality and poor earnings, but unwinding of these risks will take some time, implying that resolution of bad assets and continued high credit costs will hinder the sector’s near-term performance. The rating agency, however, added that it may revise the outlook on Indian banks this year to stable once the government begins infusing the funds.