Qualified institutional placements (QIPs) of public sector (PSU) banks amounting to Rs 20,000-25,000 crore have hit a wall as a steep correction in their share prices and the bad debt overhang have spooked investors.
State Bank of India (SBI), IDBI Bank, Punjab National Bank (PNB) , Central Bank of India, Indian Overseas Bank, Union Bank of India, Canara Bank and Oriental Bank of Commerce are among those that have put QIP plans on hold. SBI, for instance, sought shareholder approval last month to raise Rs 15,000 crore through a combination of rights issue, QIP and Follow-On Public Offering (FPO). IDBI Bank planned to raise about Rs 3,700 through a QIP.
“There has been discomfort among merchant bankers to market QIPs of these banks because of the uncertainty around bad debts,” said Dara Kalyaniwala, vice-president - investment banking, Prabhudas Lilladher. “Investors would rather buy through the open market than wait for a QIP issue.”
Banks are now looking at tier-I or tier-II capital such as perpetual bonds and subordinated debt to raise money, said experts.
“We have a permission to raise money through a QIP for the past seven quarters but are waiting for the right time and price,” said Arun Tiwari, chairman and managing director, Union Bank of India. “At the moment, we have adequate capital for our intended loan book growth under current economic conditions.”
According to N S Venkatesh, executive director at IDBI Bank, the bank’s overseas roadshow for QIP last month had seen good response, but it decided to call off the QIP after a market meltdown. “We are well capitalised and will take a call based on how market moves,” he said.
Ratings agency S&P said on Tuesday that capital requirements of PSU banks for provisioning of bad loans may surge, leading to downgrades. It warned that lenders were in a weaker position than their private sector peers and could find it difficult to raise capital.
QIP is a private placement to qualified institutional buyers (QIBs) on a discretionary basis where a two-week average price is taken as the floor. “Companies can offer a five per cent discount to QIP price but in the current scenario the price can fall much below that level, making the placement unviable,” said a merchant banker, who did not want to be named.
The Nifty public sector bank index is down around 50 per cent from its January 2015 high of 4,419, pushing the sector's valuation to historic lows. The index is down to 2,064 points from 2,573 at the beginning of 2014. PSU banks have posted dismal results for December quarter after the Reserve Bank of India (RBI) told them to reclassify loans and provide for stressed assets in the third and fourth quarters of 2015-16.
“Share prices of these banks have corrected significantly in the past few months and are trading at low price to book ratios. The banks do not want to dilute equity at these low valuations,” said another merchant banker.
SBI, for instance, is now trading at 0.8 times its book value, lower than at the peak of the 2008 global crisis. The bank was valued at 1.38 times its book value in March 2009 and 1.2 times in March 2014. PNB is now trading at just over a third of its book value, compared to a price-to-book-value ratio of 1.2 times in March 2009 and 0.72 times in March 2015. An email sent to SBI and IOB went unanswered at the time of going to press. Other banks could not be reached immediately.
Investors are looking at signs of improvement in asset quality and a demonstrated turnaround for one-two quarters, before they commit to investment, said experts. “They will wait at least till the banks’ annual accounts are updated till March 31 and the budgetary allocation is taken into account,” said Kalyaniwala.
According to a recent research note by BNP Paribas, profitability for PSU banks is likely to remain under pressure in the fourth quarter of financial year 2016, and low tier-1 capital will put these banks at risk of dilution and constrain their growth prospects.