PSU Banks Update - Sector Update
Kisan Ratilal Choksey Shares and Securities Private Limited
28 Mar 2014
Available for Immediate Download
PSU Banks Update - Sector Update “Changes aimed to provide breathing space to PSU banks” Summary of key changes in BASEL III capital adequacy norms • RBI has delayed transition arrangement timeline for BASEL III capital adequacy norms from 31st March 2018 to 31st March 2019. • Loss absorption features of non equity capital instruments has been eased with two trigger points before 31st March 2019 issued instruments and after 31st March 2019 issued instruments. • Distributable items for dividend/coupon discretion on Capital Instruments clarified that dividend on common equity shares and perpetual non-cumulative preference shares will be paid out of current year profits. Furthermore, coupon on perpetual debt instrument would be restricted to current year profits only. • Basel III framework also imposes certain constraints on distributions in case the capital level of banks falls within the stipulated range as prescribed by the capital buffers framework. • One of the essential criteria with regard to the optionality of Basel III compliant capital instruments is that a bank must not do anything which creates an expectation that the call will be exercised. PSU Banks– Capital challenges remain but increased breathing space Reserve Bank’s estimates an additional capital requirement of Rs5,00,000 crore, of which non-equity capital will be of the order of Rs3,25,000 crore while equity capital will be of the order of Rs1,75,000 crore to meet BASEL III compliance. The amount that the market will have to provide to PSU banks will be in the range of Rs70,000 crore – Rs1,00,000 crore depending on how much the Government will provide. Clearly, providing equity capital of this size to PSU banks in the face of fiscal constraints poses significant challenges. A tempting option for the Government would be to issue re capitalisation bonds against common equity infusion. But this will militate against fiscal transparency. In the alternative, would the Government be open to reducing its shareholding in PSBs to below 51 per cent? If the Government decides to pursue this option, an additional consideration is whether it will amend the statute to protect its majority voting rights. Fundamentally speaking, we believe these changes in BASEL III implementation would provide breathing space to banks in general and PSU banks in particular. As far as packing order of positive impact is concerned, we think Union Bank of India, Oriental Bank of Commerce, BOB, BOI, PNB and State Bank of India would benefit the most from these changes due to their lower core tier I capital position. We have changed our target price for PSU banks based on multiple expansions on improving macro and receding pressure on asset quality due to NPA sale to ARCs and increased on focus for recovery by PSU banks’ management.