Capital ratios of public sector banks under pressure

PSU banks will need capital infusion of Rs 40,000 crore over next 15 months as NPAs spiral

The joke doing the rounds in banking circles these days is that investors are better off putting their money in bank deposits than in bank stocks.

The absence of any bank stock from several model portfolios of leading brokerages indicates the analysts are not just making light of a “stressful situation.”

The sharp run up in bad loans is not just a cause because stressed assets are eroding capital ratios of state-owned banks. The markets had hoped that RBI’s new boss Raghuram Rajan would start easing rates to boost growth but since that isn’t happening, bad debts will continue rise at a furious pace through the fiscal.

If at all inflation abates and growth picks up, the there could be some relief in FY15.

Anyone buying into the recent rally of bank stocks only needs to look at the regulatory action and downgrades by rating agencies to know that it is nothing but a chimera. Moody’s has downgraded the country’s largest lender State Bank of India’s senior unsecured debt and local currency deposit ratings to Baa3.

This is primarily due to the steady pace at which public sector banks have been accumulating bad loans, which has affected capital ratios. Emkay Global says the Tier I capital adequacy ratio of the PSU banks, adjusted for the NPAs, has declined to 6.9% (despite continuous capital infusion) against 7.9% in FY09.

The unimpaired net worth (tangible net worth minus net NPAs) as percentage of total assets has declined from 5.5% pre-crisis to almost 4.2% now and is likely to decline almost to 3.5% by FY15.

Number crunching done by analysts suggest that going by the sharp accretion in stressed assets, public sector banks will need capital infusion of Rs 40,000 crore over the next year to get their capital ratios in order.

Going by the numbers that the corporate debt restructuring cell is throwing up, the stress in the banking system is only worsening.

According to Macquarie Capital, restructuring continues at a furious pace with around 14 cases being referred to the corporate debt restructuring cell in the first two months of the second quarter of FY14, amounting to Rs 22,000 crore.

Interestingly, a lot of the restructuring happens outsde the purview of the cell. The CDR cell accounts for only 30% of the total restructuring in the banking system.

Added to this, analysts also worry about the heightened credit/deposit ratio of banks. With loan/deposit ratio at 78%, banks will have no choice but to increase deposit rates to garner more deposits. With credit growth steadily inching up to 18.2% in early September and deposit growth well below these levels, banks will look at another hike in base rate.

Analysts expect that the credit growth will moderate to 11-12% levels as macro economic conditions don’t support such growth. Don’t be fooled by the short rallies in the sector caution analysts.