Govt banks will find it difficult to raise equity

Public sector banks, prodded by the government to look at options such as rights issues and qualified institutional placement (QIP) for fund-raising, might find it difficult raising cash from the markets with the recent fall in their share prices.

The combined market capitalisation of the 25 listed public sector banks has fallen to Rs 2.3 lakh crore, just 45 per cent of their combined net worth of Rs 5.12 lakh crore.

State Bank of India, the country’s largest lender, is the only government-owned bank trading at a small premium to its book value. It has requested for a capital infusion of Rs 4,000 crore from the government.

Seven banks are trading at a third of their book value. Another 11 are trading at less than half of their book value, indicating investors’ pessimism about the sector.

Public sector banks are reeling under asset quality pressure, that has impacted their share price, analysts said. “It may sound alarming, but the market fears the bulk of the public banks’ net worth might get wiped off if they fully account for their non-performing assets,” says Dhananjay Sinha, co-head institutional equity at Emkay Global Financial Services. The gap needs to be filled by fresh equity infusion, so that banks maintain capital adequacy ratios and lending capacity, he says.

Though all banks are well above the mandatory capital requirement, more capital is required to not only fund business growth but also due to a rise in non-performing assets. SBI, for example, has seen fresh slippages worth Rs 9,000 crore in the first quarter.

The finance ministry is exhorting the bank management to raise fresh capital through equity issuances such as rights issues and QIPs. This route, however, looks difficult, given their current valuation.

The Bank Nifty, an index of banking stocks, is down 30 per cent from its yearly peak in May and 20 per cent since July 15 this year. This is much sharper than the 11.5 per cent fall in Sensex during the period.

Earlier, the plan was to infuse capital in the banks by the end of September but the current volatility in markets could delay the process.

In the current market conditions, a rights issue is likely to devolve on the promoter, that is the government, while a QIP might not elicit response from institutional investors. This will turn the government into the investor of last resort — similar to what has happened in the case of the rights issues of Tata Motors and Hindalco at the height of the Lehman crisis in 2008.

Rating agencies agree. “It will be tough for public banks to raise capital in the current economic environment. Investors will either refuse to subscribe to the issue or demand a big discount to the current price, resulting in substantial equity dilution that won’t be acceptable to the government,” says Karthik Srinivasan, senior vice-president and co-head, financial sector rating, at Icra.

In the latest budget, Finance Minister P Chidambaram set aside of Rs 14,000 crore for capital infusion into banks. He had plans to leverage by asking banks to raise additional equity capital from the open market, in proportion to the non-promoter shareholding in each bank. But it’s doubtful whether this amount will be enough to meet banks’ capital requirements, given the size of their balance sheet.