IOB, Central Bank to benefit from capital infusion: Moody's

Indian Overseas Bank and Central Bank of India will benefit from the government's recent capital infusion as they have got a higher share as a proportion of their share capital, Moody's said today.

"The capital infusion will improve their capitalisation at a time when asset quality pressure and elevated provisioning costs have negatively affected their financial performance," it said in its credit outlook titled, 'Indian Overseas Bank and Central Bank of India benefit from Government's capital infusion'.

Last week, the government announced a Rs 22,915 crore capital infusion into 13 PSBs. Of this, IOB received Rs 3,101 crore and Central Bank got Rs 1,729 crore.

The capital infusion is positive for weaker banks such as the Indian Overseas Bank (IOB) and Central Bank of India, which received a higher share of the capital allocation as a proportion of their share capital, Moody's said.

Shares of Central Bank jumped 3.08% to Rs 100.55, while IOB gained 0.18% to Rs 27.20 on BSE today.

Indian banks continue to recognise non-performing loans (NPLs) from larger leveraged corporates, especially in the steel and power sectors, pressurizing their asset quality. Also, slippages from the restructured loan book will contribute to the rise in NPLs.

"As a result, provisioning expenses are likely to remain elevated, constraining profitability and limiting the banks' internal capital generation. In this context, the capital infusion will provide some respite to the recipient banks, especially those with weak capitalisation," Moody's said.

Currently, such banks have market valuations significantly below book value, and are challenged to raise capital from public markets, it said.

Hence, they have a greater dependence on government infusions for capital support. This timely round of capital infusion augments their capitalization, aiming to improve their ability to raise equity capital from public markets, Moody's added.

The government had last year announced it will infuse Rs 70,000 crore into the state run banks over four years while they will have to raise a further Rs 1.1 lakh crore from the markets to meet their capital requirements in line with global risk norms Basel-III.

In line with the blueprint, PSU banks are to get Rs 25,000 crore each in 2015-16 and 2016-17 fiscals. Besides, Rs 10,000 crore each would be infused in 2017-18 and 2018-19.