Banks capital raising picks up, but still a long way to go: Fitch

Government’s plans to infuse capital of Rs 6,990 crore into nine state-owned banks, and the recent launch of a Rs 10,000 crore share sale by HDFC Bank, underscores the divergence between private and public banks with regard to core equity capital access, says Fitch Ratings.

India's state banks continue to be largely dependent on government for capital, while the large private banks are in a strong position to raise core equity capital directly through the markets, Fitch said in a report.

“The capital injection is part of a budgeted $1.8 billion allocation for banks in FY15, and will be credit positive for the nine recipient banks. The institutions included State Bank of India, Bank of Baroda and Punjab National Bank as well as six other smaller institutions.

“However, the capital shortfall and challenges for India's state banks will remain even after the injection. According to Fitch estimates, state banks account for 85 per cent of the system's $200 billion Basel III capital needs up to 2019. This shortfall includes an estimate for the recently announced counter-cyclical capital buffer which will be phased in over the same period,” the report added.

Furthermore, the ability to raise core equity Tier 1 (CET1) capital in the market is limited for many state banks, owing to below-book valuations alongside poor asset quality and earnings. Financial trends have been weak in the nine months ending December 2014. As a result, Fitch maintains that state-owned banks will have to continue relying on Additional Tier 1 (AT1) hybrid instruments and government capital injections to strengthen capitalisation in the short term.

The recent rise in issuance of AT1 capital by the various state-owned banks highlights this effort to build on their non-equity capital base, which adds up so far to less than 5 per cent of the cumulative AT1 requirement for state-owned banks up until FY19.

It is notable, too, that the government announced new parameters to determine the allocation of the latest Rs 6,990 crore capital injection, focusing on efficiency and earnings metrics including return on equity (ROE) and return on assets (ROA). All nine banks chosen by the government recorded above-average ROE and ROA for the time periods utilised for the capital allocation methodology.

India's private banks, in contrast, already maintain relatively healthy capitalisation levels. Healthier asset quality and earnings also mean that the larger private banks trade above book value and enjoy a level of investor confidence - the Rs 2,000 crore ($324 million) domestic portion of HDFC's share sale was more than four times oversubscribed on 5 February.

HDFC Bank is not the only private bank to have raised capital to finance growth over the medium term in the last few years. Strengthening capital positions at this time will better position several private banks to take advantage of a pick-up in economic growth in 2015. Fitch forecasts Indian real GDP to expand by 6.5 per cent this year, up from an estimated 5.6 per cent in 2014. State-run banks on the other hand, will likely have to sacrifice growth for some time - given their dependence on government capital.

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