The second-largest private sector lender, HDFC Bank, would be raising up to Rs 24,000 crore in equity, its board approved on Wednesday.
If the entire amount is raised, it would be the biggest fundraising exercise by any Indian company ever. Coal India had raised Rs 22,613 crore through offer for sale in January 2015. Around that time, in February, HDFC Bank itself had raised Rs 9,840 crore through qualified institutional placement (QIP) and American Depositary Receipts (ADRs).
Of the Rs 24,000 crore approved by the board, Rs 8,500 crore would be coming from the parent, HDFC Ltd. The rest will be raised through QIP, ADR, and GDR (global depositary receipt).
The bank’s capital adequacy ratio was healthy enough, but private sector banks always want to maintain a high capital.
The norms require banks to recognise bad debt sooner and estimate lifetime expected losses against a wider spectrum of assets. That means higher provisions. Unlike government banks, private sector banks don’t have a sure backer and therefore, are usually more proactive than the rest.
“The fundraising is a function of both - expectation of higher growth and good valuation now,” said Udit Kariwala, senior analyst, financial institutions, India Ratings and Research.
“We expect capex recovery to take place around FY20. Private banks like to upfront equity requirement, but the infusion comes with a return expectation. Refinancing and stressed assets could be envisaged as some of the opportunities,” Kariwala said, adding some private banks could also hit the market now, partly because of valuation and also because of IFRS requirements.
The fundraising will further enhance the premium valuation of HDFC Bank, wrote IDFC Securities in a research report. HDFC Bank has a price-to-book value multiple of 4.7, which is one of the highest in the banking sector already.
“The new issue will help fund growth and strengthen the capital adequacy. This will help HDFC Bank strengthen its market share and its premium valuation. As the issue will likely be book value accretive, we expect multiples to remain intact even post-dilution,” said Mahrukh Adajania and Sanket Chheda, analysts with IDFC Securities, in their report.
Preferential issuance to the promoter HDFC Ltd will happen at the face value of Rs 2 per share. The bank has also set up a special committee to decide the terms and conditions of the issue; it has not specified a date for the issue.
HDFC Bank’s net profit for the quarter ended September 2017 saw a rise of 20.1 per cent year-on-year, whereas total advances and deposits grew by 22.3 per cent and 16.5 per cent, respectively.