To cut stake, govt will have to wait until 'meaningful' recovery in banks' earnings: Fitch

The government’s decision to lower its shareholding in public sector banks would give them more flexibility to raise equity capital, but these entities may have to wait until their valuations improve, rating agency Fitch said on Friday.

“Expectations of higher restructuring in 2HFY15 and muted credit growth could further mean that earnings (and valuations) recovery will be slow and protracted,” Fitch said in a note.

“As such, the plan to reduce government stakes may have to wait until there is a meaningful recovery in earnings and, therefore, equity valuations,” the agency said.

On Wednesday, the government approved a plan to raise about Rs 1.6 lakh crore ($25.76 billion) by selling some of its stakes in state-run banks by 2019, by bringing down the holding to a minimum 52 percent.

At present, the government holds stakes ranging from 56 percent to 84 percent in 27 state-run banks. The government wants state-run banks to go to the market and raise capital tapping the retail investor base, keeping the minimum government holding at 52 percent.

Noting that this process will give only a temporary breather to state-run banks given their massive capital requirements, a Firstbiz article had on Thursday argued that only privatisation of state-run banks would help to meet their long-term capital requirements.

Fitch, in its note, said the government’s decision to lower stake in state-run banks to 52 percent is not seen as a precursor for privatisation.

“There is no indication as yet that the government has planned this decision as part of a broader privatisation initiative in the banking sector, and Fitch believes that the government’s stakes in state-owned banks is unlikely to go below 51% in the medium term,” the agency said.

Fitch expects access to core equity for state-run banks to remain challenging. “As such, state-owned banks will likely have to continue relying on Additional Tier 1 (AT1) hybrid instruments to strengthen capitalisation in the short term, despite the government’s planned sell-downs,” it said.

The rater said Indian banks will have large Basel III capital needs totalling $200 billion up to 2019, of which state-owned banks will account for around 85%.

“However, progress to strengthen capital has been slow, due to a low internal rate of capital accretion and limited access to core equity - owing to below-book valuations for many banks,” it said.

According to Fitch, asset quality and earnings continue to remain stressed for most state banks notwithstanding some signs of early recovery.

The worsening stressed asset scenario is a major risk for state-run banks.

At present, the stated amount of bad loans in the banking system is Rs 2.7 lakh crore, while the restructured loans are estimated to be between Rs 5 lakh crore and Rs 6 lakh crore.