Home >Markets >Mark To Market >Capital raising at public sector banks is necessary but not sufficient

India’s public sector lenders are on a capital-raising spree. In the past few months, several lenders have either raised funds or announced plans to do so through the qualified institutional placement (QIP) route.

Union Bank of India mopped up 1,447 crore through a QIP in July, while Canara Bank raised a sum of 2,500 crore earlier this month. Bank of India has announced a QIP issue of 3,000 crore with a floor price of 66.19 per share. Insufficient capital in the wake of high non-performing assets (NPAs) has been an affliction of public sector banks for the past few years. Before the coronavirus outbreak, some lenders had slipped below the minimum regulatory requirement on capital adequacy ratios.

With chronic capital deficiency staring at them, 10 public sector banks were merged to form four large ones in FY20. The synergies of the mergers are starting to accrue to lenders now and the ultra-low interest rates have meant that deposit-heavy lenders are reaping the benefits of low cost of funds.

Building up
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Building up

Lenders have reported robust performance in FY21, a year ravaged by the pandemic. The increased profitability has improved capital adequacy ratios as well, along with the mergers.

Now, lenders want to fortify their capital further for growth purposes. With a long-standing troubled area being addressed, one would expect valuations to improve for lenders. However, even today, excluding the largest lender, State Bank of India (SBI), shares of most public sector lenders trade at a deep discount to their estimated book value one-year ahead.

This is because it is still uncertain how much of stress from the pandemic would emerge on the balance sheets of the banks. Fresh capital is likely to go towards growth, but opportunities to lend have reduced after the pandemic.

What’s more is that incremental provisioning needs may not fall dramatically for public sector banks. Thus, part of the proceeds of QIPs may end up being used to ward off stress. Take the case of Canara Bank. The lender raised 2,500 crore through a QIP on 24 August at 149.65 per share.

“We believe that the capital raise will mainly shore up its capital ratios, which remain sub-par compared to peers after the merger with Syndicate Bank," analysts at Emkay Global Financial Services Ltd had pointed out in a 25 August note.

To be sure, lenders may see some gains from resolution of insolvency accounts, thereby reducing need for more capital. But until they demonstrate both the growth and high capital ratios, valuations won’t improve much from here on

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