PSBs need up to $37 bn capital to meet Basel-III norms

According to Moody's, low capital levels remain a key credit weakness for the public-sector bank

Global rating agency Moody’s said on Monday the 11 Indian public sector banks (PSBs) rated by it will need to raise up to $37 billion in external capital to meet Basel-III norms by March 2019.

This assessment is based on an assumption of a moderate recovery in economic growth and a gradual decline in new non-performing loans (NPLs) formation from the currently elevated levels. According to this, the Indian PSBs  will have to raise between Rs 1.5 lakh crore ($26 billion) and Rs 2.2 lakh crore ($37 billion) as Tier-I capital by FY19, Moody’s said in a statement. These PSBs represent 62 per cent of net loans in the Indian banking system.

“Indian public-sector banks barely meet the current minimum capital requirements, and we anticipate they will find it difficult to raise capital quickly in the current environment,” said Moody’s Vice-President Gene Fang.

Basel-III norms raise the minimum required capital levels for total Tier-1 to seven per cent and for Common Equity Tier-1 (CET1) capital to 5.5 per cent. Plus, banks will need to meet a “capital conservation buffer” in order to pay dividends, Moody’s noted.

This would put pressure on Indian public-sector banks, because low capital levels remain a key credit weakness, the rating agency added.

“Weak asset quality has depressed profitability and internal capital generation, leaving public-sector banks reliant on periodic capital injections from the government,” said Fang.

With the new Bharatiya Janata Party (BJP)-led government at the Centre looking to reduce the country's Budget deficit, the amount available for such injections is not likely to grow. While banks can tap the equity markets to raise capital, with still-low bank valuations, they might struggle to raise the required amount. That's despite the recent rally in Indian stock prices, Moody’s noted.

According to the rating agency, a significant part of the required capital — Rs 80,000 crore ($13 billion) to Rs 90,000 crore ($15 billion) — could be in the form of additional Tier-1 (AT1) capital. AT1 will have a fairly limited role when Basel-III is fully phased in from 2019. However, in the meantime, a significant amount of Indian public-sector banks’ current Tier-1 requirements could be met with AT1 securities.

Under the transitional requirements, AT1 can account for the difference between the targeted eight per cent Tier-1 requirement and the 5.5 per cent minimum CET1 requirement for March 2015.

At the same time, AT1 securities would most likely be sold to domestic or international fixed-income investors.
THE BILLION $ QUESTION

• $37 bn: The amount Indian PSBs it rates would need by March 2019 to be Basel-III compliant
• Basel-III norms raise the minimum required capital levels for both Tier-I capital to 7% and CET-I capital to 5.5%
• These PSBs represent 62% of net loans in the Indian banking system
• Around $13-15 billion of the required capital could be in the form of AT1 capital