Indian financial institutions have been in risk-aversion mode amid the disruptions cased due to COVID-19. This has led them into a race to build an anticipatory capital buffer for the near term.
A slew of banks, non-bank lenders and others have either raised capital or announced plans to raise capital since the outbreak of the virus. ICICI Bank and Axis Bank have recently announced their plan to raise up to Rs 15,000 crore each this year. IDFC First Bank was one of the first private banks to hit the market earlier in May when it raised Rs 2,000 crore via a preferential issue. Kotak Mahindra Bank followed soon after to raise Rs 7,442.5 crore via a QIP.
However, questions continue on financiers’ loss-absorption capacity and whether they will be able to grow after the hit from COVID.
ICICI Securities’ latest report answers all the 5 Ws relating to the banks’ recent capital raising activities.
WHO - Early movers are entities with high buffers, but is the need universal?
Financiers with adequate capitalization and provisioning buffers such as Kotak Mahindra Bank, Axis Bank, HDFC Ltd are amongst the early movers. However, the capital needs will be universal and unavoidable. ICICI Securities said.
The brokerage expects more than $20 billion of equity raising by banks and over $8 billion by non-bank lenders over the next 12-18 months. The ones who would tend to defer it would include players who have recently tapped equity such as Bajaj Finance, City Union Bank, Cholamandalam Finance, Piramal, etc., or are unwilling to dilute at beaten-down valuations such as South Indian Bank, LIC Housing Finance, PNB Housing Finance, ICICI Securities said.
WHAT - Is the magnitude being evaluated a tall ask?
According to the brokerage, financiers are already conserving capital by deferring dividends and improving risk profile of assets. Also, growth will take a backseat in the near to medium term either due to lack of opportunities or low appetite. Incrementally banks’ narrative suggests that credit costs look manageable given the profile of their operating profit ratios.
The magnitude of capital raise being evaluated by financiers is much on the higher side given capital-conservative policies implemented through dividend payout restriction, improving RWA profile, limited risk appetite, comfortable operating profit levels.
WHY – is it risk, confidence or growth capital?
The primary intention of capital raise is to demonstrate enough confidence to regulators as well as rating agencies that they are resilient enough to absorb losses, ICICI Securities said. Given the difficulty in drawing a red line on the extent of impairment when risks are looming large, it is better to be risk-averse and not to be caught unprepared. Also, for the stronger players, GIGO – Get In (Capital), Get Out (Stress) – can help refocus the excess capital on pursuing (organic or inorganic) growth opportunities.
“Once out of the woods with better visibility, we believe players with capital buffer, limited stress baggage and lower funding cost, will have pricing power to pick up better credit. Consequently, we believe utilisation of the proposed capital raising would be either for risk or growth or confidence or combination of all,” the report adds.
WHEN is the right time – now or a couple of quarters later?
This frontloading contingency as well as the capital plan approach is led by an alarm to be extra risk-averse in an unprecedented crisis situation or demand/supply considerations, and early mover advantage could be the right option. “In fact, right timing is a trade-off in their assessment of right multiple – at a discount to existing unimpaired net worth, or at a premium to impaired net worth,” the report said.
WHERE – Is it India-specific or witnessed globally?
The report noted that the core equity raising was more pronounced and peculiar in India and there was no such rush for capital in the developed or other emerging markets. This too, when Indian banks’ tier-1 capital is at par with global peers.
“We believe, given credit rating vulnerability (country-specific rationale) and recent downgrades by rating agencies, leading banks would willingly sit on the excess buffer to avoid further downgrades,” the brokerage said.