State Bank of India (SBI), the country’s largest lender by assets, has initiated the process to raise up to Rs 15,000 crore from the market by securing the go-ahead from its investment committee to execute the plan.
This enables the lender to go for capital raising from existing or new investors within a year through a follow-on issue, rights issue or share sale to institutional investors. The process would bring down the government’s holding in the bank, currently at 58.6 percent to about 54-55 percent.
SBI hasn’t put any timeline to complete the capital raising but one should expect the bank to hit the market sooner rather than later when the capital markets are on a record breaking spree and investor sentiments are robust on expected sharp recovery in the economy over the next few quarters and fresh fund inflows.
In January 2014, SBI had raised about Rs 8,000 crore through a share sale in the form of qualified institutional placement (QIP). The issue, however, was largely bailed out by state-run Life Insurance Corporation of India (LIC), which bought about one-third of the stocks.
The reason was SBI issue didn’t have much appetite among foreign institutional investors in a struggling economy at that point.
This time around, the scene looks much better with stock markets riding high on the optimism that the economy will revive under the Narendra Modi government, which has also instilled confidence about the India growth story among global investors.
In all likelihood, the SBI issue would evoke a much better response without the government having to prod LIC to open its coffers to rescue the float.
This, more importantly, is a wake up call for other state-run banks too to begin tapping the fresh investor appetite before the market gets crowded by a series of similar issues by other state-run entities and even private companies.
Public banks are in urgent need for funds on account of the approach of Basel-III compliance, high level of stressed assets on their books and expected pick up in credit growth once the economy gets back on the high growth path.
Global ratings agency Moody’s Investors Service estimates the 11 state-run banks it rates alone would need anything between Rs 1.5 lakh crore and Rs 2.2 lakh crore, or $26 billion and $37 billion, to comply with Basel-III. These are estimates and the actual requirement could vary, likely on the upside. The deadline for Basel-III compliance is March 2019.
As per the Basel-III norms, banks need to have minimum equity capital adequacy ratio of 7 percent and Common Equity Tier-1 (CET-1) capital of 5.5 percent. A Firstpost analysis of Capitaline data shows that at least five government banks have Tier-I capital adequacy less than 8 percent.
In addition, banks will also need to build a 2.5 percent capital conservation buffer to be used in bad times. Besides, state-run banks will certainly miss the bus if they don’t have adequate capital to expand their loan book when the economy revives, stalled projects get back on track and bad loan situation eases. As of now, these banks are cash-starved.
Analysts said the reason for other state-run banks not rushing with capital raising plans is the absence of any major revival in loan growth. But if SBI manages to raise money on its own, that would give more headroom for the government to infuse money in other banks, they said.
"Others aren't confident of loan growth... Restructured book is on the higher side and capital consumption rate is also high," said Abhishek Kothari, analyst at Quant Capital.
The government’s ability to pump capital into banks appears severely constrained given finance minister Arun Jaitley’s focus on fiscal consolidation. Its coffers do not have much to offer to the capital-starved public sector banks. They better find ways on their own when the situation in the markets is favourable.
SBI’s share sale should act as a trigger.
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Updated Date: Jan 28, 2015 15:38:59 IST