For public sector banks, the curse of capital shortage is continuing
2 min read.Updated: 16 Jun 2019, 09:06 PM ISTAparna Iyer
SBI has deferred its fundraising plan via QIP to a later date, citing no need for fresh capital
Investors still cold to state-run bank shares, reflected in Nifty PSU Bank’s 7% fall in last two months
Capital has been a challenge for public sector banks. A decade ago, they had too much of it, which only made their inefficiencies look stark. Today, they have too little to keep them afloat or grow.
But balance sheets are healing and fresh money from the government has meant many of them won’t starve. Add the prospects of higher loan growth, and investors should be attracted towards public sector banks. But that is not playing out yet.
The largest of them, State Bank of India (SBI), has deferred its plans to raise money through a qualified institutional placement (QIP) issue, according to an IFR Asia article. The lender had secured approvals from its shareholders in December to raise about ₹20,000 crore by issuing equity shares.
The story quotes SBI’s deputy managing director and chief financial officer Prashant Kumar as saying that the lender has no burning need to raise capital immediately.
This may well be a case of calling the grapes sour when they are out of reach. Mint reported late last month that SBI was close to raising capital, since the elections were out of the way. It’s likely demand in the primary market hasn’t picked up post-elections, as issuers such as SBI had hoped.
Thankfully for SBI, it has a comfortable Common Equity Tier 1 capital ratio of 9.62% and a total capital adequacy ratio of 12.72% as of March. That is above the regulatory minimum for both, and enough to fund 12% credit growth. Its toxic loans have been reducing as well.
Indeed, SBI’s stock has gained more than 9% in the last two months and now trades at 1.3 times its estimated book value for FY20. Considering the heft it has because of the balance sheet size, the bank’s valuation is reasonable compared with its closest peers.
But if SBI is looking at a valuation of ₹3.5 trillion, as said in IFR Asia, which is roughly 16% higher than the current level, the bank will have to wait.
What about the other public sector banks?
Analysts believe that the drag on earnings would continue as banks are yet to fully insure their balance sheets through provisioning. Coverage ratios began to rise only in the fourth quarter for most lenders. Moreover, even if the corporate loan book heals, many banks are likely to see increased stress in agriculture and small business loans.
The Nifty PSU Bank index has dropped nearly 7% in the last two months, a sign that investors will give a cold shoulder to any attempts from lenders to raise money from the market. After all, public sector banks are still loss-making entities with negative return on assets, a combination that would keep investors away.
Hence, investors don’t see a big revival in the earnings of public sector banks. Perhaps the responsibility of removing the curse of capital would fall into the hands of the government again.