PSU banks extend rally; CNX PSU Bank index up nearly 3%

SBI, Andhra Bank, IDBI Bank, Allahabad Bank, Canara Bank, Union Bank and Syndicate Bank are up 3% each on NSE.

Banking shares mainly public sector undertakings (PSU) are trading higher between 2-3%, extending their yesterday’s late noon surge on the National Stock Exchange (NSE).

State Bank of India (SBI), Andhra Bank, Punjab National Bank, IDBI Bank, Allahabad Bank, Canara Bank, Union Bank of India and Syndicate Bank are up nearly 3% each, while Oriental Bank of Commerce, Indian Overseas Bank, Bank of Baroda and Bank of India are up 2% each on NSE.

At 0955 hours, CNX PSU Bank index was up nearly 3% at 4,184 points as compared to 1.18% rise in the benchmark CNX Nifty. The state-owned bank index has rallied over 7% from its intra-day low of 3,899 touched on Wednesday.

According to Moody's Investors Service, the ability to raise private capital that dilutes the government’s stake is credit positive for undercapitalized public-sector banks because government resources to recapitalize the banks are limited.

On 10 December, the cabinet said that it would allow government ownership in public-sector banks to fall to 52% as the banks raise capital to meet Basel III requirements, which will steadily rise until 2019.

If the 11 rated public-sector banks were to immediately issue new shares to dilute the government stake in each bank to 52%, it would generate Rs 72,900 crore in new capital at current market prices, which we estimate would lift reported Tier 1 ratios to 8.2%-12.2% from 7.3%-9.6%, Gene Fang, Vice President - Senior Credit Officer, Financial Institutions Group, Moody's Investors Service said in a report.

We expect those public-sector banks trading at higher price-to-book ratios, including SBI (Baa3 stable, D+/ba1 negative), at 1.5x, and Bank of Baroda (Baa3 stable, D/ba2 negative), at 1.2x, to have an easier time raising equity capital. But the cabinet is also providing weaker public-sector banks with lower price-to-book ratios greater latitude to raise capital, since majority shareholder dilution will be less of a constraint, added report.