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RBI breather to reduce PSU banks' extra capital need by 15%

SBI, BoB capital adequacy ratios climb up by 100 basis points

Major could see their capital adequacy ratio (CAR) increasing by 20 to 100 basis points after the eased some rules on Tuesday to boost their capital.

Leading ones such as (SBI) and (BoB) could see their increasing by 100 basis points. Confirming it, SBI Deputy Managing Director and Chief Financial Officer said the bank already had a comfortable tier-I capital of 9.64 per cent, much above regulatory minimum.



On Tuesday, the Reserve Bank of India (RBI) allowed the banks to recognise some of their assets, such as a part of their real assets, foreign currency, and deferred tax, with suitable haircuts.


Banks can now account for 45 per cent of their revalued real estate assets in the common equity tier-1 (CET-1) - paid-up capital, reserves and provisions.

The move is aimed to boost the regulatory capital of banks and align it with the international standards.


According to ICRA, an independent credit rating agency, public sector banks (PSBs) will now have to raise tier-I capital of Rs 1,60,000 crore to Rs 2,60,000 crore between the financial years 2016-17 and 2018-19. The earlier estimates of raising capital was between Rs 1,90,000 crore and Rs 3,00,000 crore.

Reacting to the move, bank shares led the stock market rally on Wednesday.

SBI, ICICI Bank and Punjab National Bank were the top three gainers in the Nifty. The Nifty Bank index, which comprises both private and public sector banks, was up 4.7 per cent while the Nifty PSU Bank index gained 9.9 per cent, its largest single-day gain since May 2009.

Executives of PSBs said the RBI's move comes as support at a time when raising equity capital from the market is tough, given low valuations.

PSBs' internal capital generation has been under severe pressure because of higher provisions for bad loans and reversal of interest income that was booked earlier.

Experts say the benefit from revaluation of real estate assets and the capital released from foreign currency translation reserves is clear, but the impact of deferred tax asset is a complex calculation. The benefit from foreign currency translation reserves will favour banks with international operations such as BoB, SBI and ICICI Bank.

Foreign brokerage CLSA said, "As on March 2015, public sector banks had revaluation reserves of about $4 billion (approximately Rs 27,000 crore) and their inclusion at 45 per cent factor can add close to $1.8 billion (Rs 12,000 crore) to tier-I capital."

Additionally, public sector banks are expected to revalue more assets, which can incrementally release a similar amount, giving a total lift of another Rs 20,000-25,000 crore from revaluation reserves.

The CLSA report added the public sector banks had foreign currency translation reserves of about $1.6 billion (Rs 10,800 crore) and their inclusion at 75 per cent factor could boost Tier-I capital by $1.2 billion (Rs 8,100 crore).

"We understand that inclusion of deferred tax asset (up to 10 per cent of Core Tier-I) can release $2-3 billion (Rs 13,500- 20,000 crore) for public sector banks," CLSA said.

Domestic broking house Motilal Oswal Securities said the allowed revaluation reserve (at 55 per cent discount) to be a part of core equity capital as of now. While some large banks like the Bank of India have already revalued assets and utilised the benefit as a tier-II capital, most other banks are yet to do so.

For banks which have already recognised it, the revaluation constitutes 10-15 per cent of net worth and 50-80 basis points of tier-II capital. Banks, which have already recognised assets, are unlikely to see change in capital adequacy ratio as it will be a movement from tier-II capital to tier-I, MOSL said.

Not everyone welcomed of the move. Pratip Chaudhuri, the former chairman of the SBI, said this isn't a prudent way to provide for capital.

"Tier-I capital should have loss-absorption capacity - it should be cash or cash on call. The revalued real estate does not have this feature," he said, adding the new capital class was "somehow capital".

Rating agency ICRA added that the changes in Basel-III norms will provide only near-term respite for public sector banks. However, long-term concerns on these banks' credit profile remain.

The government has already committed Rs 25,000 crore equity infusion in public sector banks for FY17. The total tier-I capital requirements of the banks, estimated at Rs 40,000-60,000 crore for FY17, could be easily met, the rating agency said.

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Business Standard
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Business Standard

RBI breather to reduce PSU banks' extra capital need by 15%

SBI, BoB capital adequacy ratios climb up by 100 basis points

BS Reporter  |  Mumbai 



Higher provisions to hit bank results in Q3

Major could see their capital adequacy ratio (CAR) increasing by 20 to 100 basis points after the eased some rules on Tuesday to boost their capital.

Leading ones such as (SBI) and (BoB) could see their increasing by 100 basis points. Confirming it, SBI Deputy Managing Director and Chief Financial Officer said the bank already had a comfortable tier-I capital of 9.64 per cent, much above regulatory minimum.



On Tuesday, the Reserve Bank of India (RBI) allowed the banks to recognise some of their assets, such as a part of their real assets, foreign currency, and deferred tax, with suitable haircuts.


Banks can now account for 45 per cent of their revalued real estate assets in the common equity tier-1 (CET-1) - paid-up capital, reserves and provisions.

The move is aimed to boost the regulatory capital of banks and align it with the international standards.


According to ICRA, an independent credit rating agency, public sector banks (PSBs) will now have to raise tier-I capital of Rs 1,60,000 crore to Rs 2,60,000 crore between the financial years 2016-17 and 2018-19. The earlier estimates of raising capital was between Rs 1,90,000 crore and Rs 3,00,000 crore.

Reacting to the move, bank shares led the stock market rally on Wednesday.

SBI, ICICI Bank and Punjab National Bank were the top three gainers in the Nifty. The Nifty Bank index, which comprises both private and public sector banks, was up 4.7 per cent while the Nifty PSU Bank index gained 9.9 per cent, its largest single-day gain since May 2009.

Executives of PSBs said the RBI's move comes as support at a time when raising equity capital from the market is tough, given low valuations.

PSBs' internal capital generation has been under severe pressure because of higher provisions for bad loans and reversal of interest income that was booked earlier.

Experts say the benefit from revaluation of real estate assets and the capital released from foreign currency translation reserves is clear, but the impact of deferred tax asset is a complex calculation. The benefit from foreign currency translation reserves will favour banks with international operations such as BoB, SBI and ICICI Bank.

Foreign brokerage CLSA said, "As on March 2015, public sector banks had revaluation reserves of about $4 billion (approximately Rs 27,000 crore) and their inclusion at 45 per cent factor can add close to $1.8 billion (Rs 12,000 crore) to tier-I capital."

Additionally, public sector banks are expected to revalue more assets, which can incrementally release a similar amount, giving a total lift of another Rs 20,000-25,000 crore from revaluation reserves.

The CLSA report added the public sector banks had foreign currency translation reserves of about $1.6 billion (Rs 10,800 crore) and their inclusion at 75 per cent factor could boost Tier-I capital by $1.2 billion (Rs 8,100 crore).

"We understand that inclusion of deferred tax asset (up to 10 per cent of Core Tier-I) can release $2-3 billion (Rs 13,500- 20,000 crore) for public sector banks," CLSA said.

Domestic broking house Motilal Oswal Securities said the allowed revaluation reserve (at 55 per cent discount) to be a part of core equity capital as of now. While some large banks like the Bank of India have already revalued assets and utilised the benefit as a tier-II capital, most other banks are yet to do so.

For banks which have already recognised it, the revaluation constitutes 10-15 per cent of net worth and 50-80 basis points of tier-II capital. Banks, which have already recognised assets, are unlikely to see change in capital adequacy ratio as it will be a movement from tier-II capital to tier-I, MOSL said.

Not everyone welcomed of the move. Pratip Chaudhuri, the former chairman of the SBI, said this isn't a prudent way to provide for capital.

"Tier-I capital should have loss-absorption capacity - it should be cash or cash on call. The revalued real estate does not have this feature," he said, adding the new capital class was "somehow capital".

Rating agency ICRA added that the changes in Basel-III norms will provide only near-term respite for public sector banks. However, long-term concerns on these banks' credit profile remain.

The government has already committed Rs 25,000 crore equity infusion in public sector banks for FY17. The total tier-I capital requirements of the banks, estimated at Rs 40,000-60,000 crore for FY17, could be easily met, the rating agency said.

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RBI breather to reduce PSU banks' extra capital need by 15%

SBI, BoB capital adequacy ratios climb up by 100 basis points

RBI breather lets SBI, BoB capital adequacy ratios climb up by 100 basis points Major could see their capital adequacy ratio (CAR) increasing by 20 to 100 basis points after the eased some rules on Tuesday to boost their capital.

Leading ones such as (SBI) and (BoB) could see their increasing by 100 basis points. Confirming it, SBI Deputy Managing Director and Chief Financial Officer said the bank already had a comfortable tier-I capital of 9.64 per cent, much above regulatory minimum.

On Tuesday, the Reserve Bank of India (RBI) allowed the banks to recognise some of their assets, such as a part of their real assets, foreign currency, and deferred tax, with suitable haircuts.


Banks can now account for 45 per cent of their revalued real estate assets in the common equity tier-1 (CET-1) - paid-up capital, reserves and provisions.

The move is aimed to boost the regulatory capital of banks and align it with the international standards.


According to ICRA, an independent credit rating agency, public sector banks (PSBs) will now have to raise tier-I capital of Rs 1,60,000 crore to Rs 2,60,000 crore between the financial years 2016-17 and 2018-19. The earlier estimates of raising capital was between Rs 1,90,000 crore and Rs 3,00,000 crore.

Reacting to the move, bank shares led the stock market rally on Wednesday.

SBI, ICICI Bank and Punjab National Bank were the top three gainers in the Nifty. The Nifty Bank index, which comprises both private and public sector banks, was up 4.7 per cent while the Nifty PSU Bank index gained 9.9 per cent, its largest single-day gain since May 2009.

Executives of PSBs said the RBI's move comes as support at a time when raising equity capital from the market is tough, given low valuations.

PSBs' internal capital generation has been under severe pressure because of higher provisions for bad loans and reversal of interest income that was booked earlier.

Experts say the benefit from revaluation of real estate assets and the capital released from foreign currency translation reserves is clear, but the impact of deferred tax asset is a complex calculation. The benefit from foreign currency translation reserves will favour banks with international operations such as BoB, SBI and ICICI Bank.

Foreign brokerage CLSA said, "As on March 2015, public sector banks had revaluation reserves of about $4 billion (approximately Rs 27,000 crore) and their inclusion at 45 per cent factor can add close to $1.8 billion (Rs 12,000 crore) to tier-I capital."

Additionally, public sector banks are expected to revalue more assets, which can incrementally release a similar amount, giving a total lift of another Rs 20,000-25,000 crore from revaluation reserves.

The CLSA report added the public sector banks had foreign currency translation reserves of about $1.6 billion (Rs 10,800 crore) and their inclusion at 75 per cent factor could boost Tier-I capital by $1.2 billion (Rs 8,100 crore).

"We understand that inclusion of deferred tax asset (up to 10 per cent of Core Tier-I) can release $2-3 billion (Rs 13,500- 20,000 crore) for public sector banks," CLSA said.

Domestic broking house Motilal Oswal Securities said the allowed revaluation reserve (at 55 per cent discount) to be a part of core equity capital as of now. While some large banks like the Bank of India have already revalued assets and utilised the benefit as a tier-II capital, most other banks are yet to do so.

For banks which have already recognised it, the revaluation constitutes 10-15 per cent of net worth and 50-80 basis points of tier-II capital. Banks, which have already recognised assets, are unlikely to see change in capital adequacy ratio as it will be a movement from tier-II capital to tier-I, MOSL said.

Not everyone welcomed of the move. Pratip Chaudhuri, the former chairman of the SBI, said this isn't a prudent way to provide for capital.

"Tier-I capital should have loss-absorption capacity - it should be cash or cash on call. The revalued real estate does not have this feature," he said, adding the new capital class was "somehow capital".

Rating agency ICRA added that the changes in Basel-III norms will provide only near-term respite for public sector banks. However, long-term concerns on these banks' credit profile remain.

The government has already committed Rs 25,000 crore equity infusion in public sector banks for FY17. The total tier-I capital requirements of the banks, estimated at Rs 40,000-60,000 crore for FY17, could be easily met, the rating agency said.
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