Capital infusion will dilute banks’ book value: Jefferies

Chennai, July 20 (IANS) The recapitalisation of 13 government banks, announced by the central government on Tuesday, will result in dilution of their book value per share for banks with larger capital infusion, said investment banking firm Jefferies.

In a report, Jefferies said: “Banks with larger capital allocations relative to their common equity tier 1 (CET1) are typically the ones to see a steeper dilution of book value per share, given that stock prices for the SOE (state-owned enterprise) banking space have remained largely depressed for the last several quarters now.”

Based on current market prices, the largest book value per share hit will be seen for Indian Overseas Bank (IOB, 28 per cent), United Bank of India (20 per cent), Bank of India (12 per cent) and Dena Bank (12 per cent).

At current market prices, the book value dilution is zero per cent for State Bank of India and three per cent for Punjab National Bank. The key beneficiaries in terms of CET1 jump are IOB, United Bank of India, Central Bank of India and UCO Bank.

The central government has announced capital infusion of Rs 22,915 crore for 13 banks.

Meanwhile, global credit rating agency Fitch Ratings said the fresh infusion of capital is unlikely to address the pressures on the system driven by economic growth in light of the significant asset quality pressures and weak profitability prospects of these banks.

Fitch estimates the Indian banks will need $90 billion in total additional capital — most of which will be accounted for by the public banks — to meet Basel III requirements by 2019.

Banks other than the 13 that would get the fresh capital infusion will need to source additional capital.

Fitch believes that the pressures on public bank credit profiles will remain, and more capital than the Rs 700 billion ($10.4bn) earmarked through to FYE19 will be needed from the government to restore market confidence and position the sector for long-term growth.

“Losses at public-sector banks in the second half of the fiscal year ending March 2016 were double the government’s capital injection in FY16, and eroded the equivalent of nearly 15 per cent of end-FY15 capital,” Fitch Ratings said.

This caused loan-book contraction at many public banks, which brought sector-wide credit growth to below 10 per cent in FYE16, the lowest increase in a decade.

Fitch Ratings maintains that, while non performing loans (NPL) are near a peak, asset quality could deteriorate further through the next 18 months, exacerbated by public sector banks exposure to stressed sectors, the challenging resolution process for stressed assets and delayed recognition of problem loans by banks.

Weak earnings linked to low loan growth and high credit costs will add to these challenges, and continue to make it difficult for public sector banks to access additional capital from sources other than the government.

Challenges with market access could add to the risks that the government will need to be the main source of new equity capital for these banks.

The market currently values almost all of the listed public banks well below the book value, Fitch Ratings added.



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