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Business News/ Markets / Mark To Market/  In need of covid-19 capital, PSU banks hit the hardest
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In need of covid-19 capital, PSU banks hit the hardest

Credit Suisse estimates that in all Indian banks would need $20 billion of capital to absorb the hit from the pandemic
  • Despite recent mergers, PSU banks' capital position is weak. Their valuations have been beaten down in the last four years
  • The Centre hasn’t detailed any plans for recapitalisation this year. In the absence of infusion, public sector banks may have to access the market.Premium
    The Centre hasn’t detailed any plans for recapitalisation this year. In the absence of infusion, public sector banks may have to access the market.

    MUMBAI: Financial stocks have been one of the worst hit in recent times as the covid-19 pandemic has not only snuffed out potential balance sheet growth but also increased the risk of delinquencies.

    The narrative around capital has returned with this and as in the past, public sector banks would be the hardest hit this time as well.

    Credit Suisse estimates that, in all, Indian banks would need $20 billion of capital to absorb the hit from the pandemic. “Private banks’ tier 1 capital at 13% is adequate to absorb up to 5% of loans turning into non-performing loans. However, with 20-40% of loans under moratorium and uncertainty on the economic impact, we expect most banks to raise further capital. Of this, PSUs could require US$10-13 billion recap," said a note from Credit Suisse.

    Private sector lenders have already begun detailing their plans for capital.

    Kotak Mahindra Bank Ltd will likely be the first to access the market with its 7,500 crore qualified institutional placement (QIP). Media reports suggest that private equity firm Carlyle Group is looking to invest in Axis Bank Ltd. If this is through a fresh issuance of shares, the bank will get a much needed infusion of capital and its investors will get more confidence in it.

    To be sure, private lenders such as Axis Bank are better off than public sector peers in their capital adequacy. Their operating profitability metrics too are superior, despite many reporting a drop in net profit for the March quarter. Ergo, the valuations they command would be superior to those of public sector banks.

    For instance, Kotak Mahindra Bank has set a floor price of 1,147.75 apiece for its QIP. That is 22% higher than the issue price of 936 of its QIP in May 2017. The lender’s shares have lost 27% since February but its valuation is still historically better. Also, Kotak Mahindra Bank’s capital adequacy ratio is one of the highest among peers.

    Most public sector banks are near the regulatory minimum for Tier-1 capital. Public sector banks still account for more than half of credit flow to the industry. Notwithstanding recent mergers, the capital position is still weak. Their valuations have been beaten down in the last four years. The easiest way for them to raise money is an infusion from the government. However, the centre hasn’t detailed any plans for recapitalisation this year. In the absence of infusion, public sector banks may have to access the market.

    That would mean a great deal of dilution of the government’s stake. Perhaps the time has come for the government to lighten its hold on lenders.

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    Published: 27 May 2020, 03:07 PM IST
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