Indian banks are expected to raise a massive $20 billion as they look to shore up capital buffers as CET levels for most private banks is around 13 percent and with pre-provision profitability (PPoP RoA) of 2-3 percent they have the ability to absorb around 4 percent of additional credit costs, said a report.
Indian banks are expected to raise a massive $20 billion as they look to shore up their capital buffers. The Common Equity Tier (CET) levels for most private banks are around 13 percent and with pre-provision profitability (PPoP RoA) of 2-3 percent they have the ability to absorb around 4 percent of additional credit costs, said a Credit Suisse report.
Recommended ArticlesView All
New Locker Rules — Here's why the RBI has gone overboard
Jan 28, 2023 IST5 Min(s) Read
Meet Padma Shri Awardee Guru K Kalyanasundaram Pillai, the man who is keeping an ancient tradition alive
Jan 27, 2023 IST3 Min(s) Read
This is how the new draft IT rules propose to make online gaming safe
Jan 27, 2023 IST4 Min(s) Read
78 percent Indian workers uneasy about job security amid layoffs: Survey
Jan 27, 2023 IST5 Min(s) Read
The PSU Banks' capital levels are above the regulatory thresholds at 9-11 percent but given low profitability, the ability to absorb credit cost is only 200 bps, said a report by Credit Suisse. The global brokerage expects private banks to look to maintain the minimum CET1 threshold of 12 percent, while PSUs are likely to be comfortable even with a 9 percent Tier 1.
“Private banks’ Tier1 at 13 percent is adequate to absorb up to around 5 percent of loans turning into non-performing loans (NPL). However, with 20-40 percent of loans under moratorium and uncertainty on the economic impact, we expect most banks to raise further capital. Of this, PSUs could require $10-13 billion recapitalisation,” Credit Suisse report said.
The latest example of this is Kotak Mahindra Bank that announced qualified institutional placement (QIP) of 6.5 crore equity shares to raise Rs 7087.36 crore. After the QIP, Kotak Bank's tier-I capital ratio will strengthen by 221 bps to 21.4 percent; making it the strongest capitalized bank in India.
For SBI and ICICI Bank, the brokerage expects part of this capital to come from paring down their stakes in insurance subsidiaries. SBI’s stake sale in insurance subsidiary to 30 percent can cover 50 percent of its capital call and for ICICI, this is 2x of capital needed, the report said.
Larger private banks have disclosed that 15-40 percent of their loans are under the moratorium, with this number higher at NBFCs (30-75 percent), and PSUs and smaller private banks (at 35-75 percent). Banks have made provisions in excess of RBI requirements, at 0.5-2.0 percent of loans under moratorium (0.2-0.5 percent of overall loans).
However, these are unlikely to suffice and the brokerage expects slippages and credit costs to be elevated in FY21E. Credit Suisse has raised its credit cost estimates by 20-60 percent given the lockdown extensions on back of which, it cut its FY21/22E and target price by 10-20 percent for the banks.
Meanwhile, rising risk aversion and accelerating rating downgrades are expected to add to India banks’ asset quality stress, the report added. It estimates Rs 2.5 lakh crore of debt is already downgraded to ratings that are likely to make refinancing challenge.
“These ‘fallen angels’ have Rs 22,000 crore of bond repayments due over the next 12 months. Despite growing liquidity, banks are turning even more risk-averse and over the past 12 months, 90 percent+ of their incremental lending has been only to >A-rated corporates. Bond market apathy to lower-rated papers also spiked, with funds with a high (20 percent+) share of lower-rated (A and below) debt seeing outflows of 20-60 percent of AUM in the past few months,” the repot noted.
Further, it also stated that NBFC and bond market liquidity challenge now constrains 70 percent of lending capacity. Asset and liability management (ALM) challenges for NBFCs are turning more severe with access to funding differentiated and a six-month moratorium on 30-70 percent of loans.
“Securitisation and the external commercial borrowing (ECB) market that was a large source of liquidity in the past 18 months have also now dried up and balance sheet liquidity is key to avoid default,” the report noted.
It estimates that 70 percent of the Indian financial system's lending capacity is now constrained. PSU banks (ex-SBI) are 25 percent of system credit and are still to emerge from NPA issues, and now in the midst of mergers. NBFCs (22 percent of credit) and small private banks (8 percent) are also pulling back given their rising liquidity constraints. Further, ECBs (5 percent) and bond markets (10 percent) are shut, particularly for borrowers with falling ratings, it added.