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Large public sector banks' shares tank as Rs 880-bn recap plan disappoints

Allotment skewed in favour of smaller banks, say analysts; Nifty PSU Bank index tanks drops 5%

Samie Modak  |  Mumbai 

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Shares of large public sector (PSBs) fell on Thursday, with some investor disappointment at the central government’s Rs 880-billion Shares of (SBI) and Union Bank of India fell five per cent each. Punjab National Bank (PNB) fell the most at 7.1 per cent; Bank of Baroda (BoB) dropped six per cent. In contrast, smaller PSBs, including UCO Bank and Punjab & Sind Bank, ended with gain. A day earlier, shares of all had rallied ahead of the recapitalisation (recap) announcement. The Centre on Wednesday announced the much-awaited plan under which it would invest a total of Rs 800 billion across 21 PSBs, through recap bonds. This is in addition to the Rs 80 billion it had infused in some. Separately, have raised Rs 120 billion by way of qualified institutional placement and by divesting holdings in non-core businesses. All this together would result in 50 per cent of the total planned recap of Rs 2.1 trillion. “We believe this is overall positive for the banking sector but not exactly in tune with the Street’s expectations,” was the comment of Jefferies, the global investment bank and institutional securities entity. “This is in contrast to market expectations of bigger or healthier receiving a higher share of capital.” “One concern among investors was that the bulk of the capital could go to larger and that smaller (which are in significant need of capital) might get less capital than needed. However, the government has allocated most of the capital to weaker banks,” said Morgan Stanley in a note.

The brokerage said smaller IDBI, UCO, Dena and Bank of Maharashtra would see an increase of 380-590 basis points (bps) in their common equity tier-1 (CET-1) ratio. SBI, on the other hand, will see its CET-1 ratio improve by only 40 bps. The Nifty PSU Bank index on Thursday fell 5.2 per cent to 3,757.7. In comparison, the Nifty Private Bank index rose one per cent, while the benchmark Nifty index ended 0.15 per cent lower. In October, when the Centre had outlined the recap plan, the Nifty PSU Bank index had surged 30 per cent in a single day to 4,010. Many analysts said the higher allotment for weaker was warranted. Most are grappling with bad loans and were in dire need of higher capital due to the new Ind-As accounting norms. “The poor performers under the Reserve Bank’s prompt corrective action (PCA) have received 60 per cent of the allotment. We believe this step was warranted by the potentially high haircuts on NCLT (National Company Law Tribunal) cases, which would have brought capital adequacy below the regulatory threshold for these and render their transition to Ind-As nearly impossible,” said JM Financials in a note. The brokerage said the first tranche of the recap announcement would cover only 38 per cent of the projected capital shortfall for the top four PSBs in FY19 —SBI, PNB, BoB and Canara Bank. Brokerages said further rounds of capital infusion should provide for the shortfall and help meet the provisioning requirements. Despite higher allotment to weaker banks, analysts still favour larger lenders. “Small could do well in the near term, given the quantum of capital; however, returning to normalised return on equity will probably take a long time. Our preferred stocks among corporate lenders remain the bigger names, as their profitability will likely return much quicker,” said Morgan Stanley. Data

First Published: Thu, January 25 2018. 22:58 IST
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