Capital infusion-positive for PSUs Banks: Analysis by Kotak Sec.

Visit http://indiaer.blogspot.com/ for complete details �� ��


Banks/Financial Institutions
India
Capital infusion-positive for PSUs. Media reports suggest that the Indian government
is likely to increase its stake in nine PSU banks to 58% with an infusion of `97 bn as
equity capital (BOB, Union Bank, OBC etc). We view this initiative as positive for banks,
as it enhances their growth leverage over the next 2-3 years. BoB will be a clear
beneficiary as the capital infusion is coming in at a higher premium relative to others.
We retain our positive view of PSU Banks. Our top picks are BOB, PNB and Union Bank.




Intent to raise government holding to 58%; OBC, Andhra and Dena to see >13% dilution
The main intent of the government seems to increase its shareholding to 58% and given that
banks with lower Tier-1 capital have been excluded in this announcement. While it is yet to be
officially confirmed, we believe that the capital infusion is likely to be in the form of equity capital.
A higher government shareholding will allow these banks to raise equity capital through the
market over the next few years. OBC, Andhra Bank and Dena Bank are likely to see a dilution of
over 13%. We expect Tier-1 capital improving by 1-23% for banks receiving the infusion.

BOB – a key beneficiary; impact on PBR at 1-7% for banks on FY2012 book
We believe banks like BoB, which trade at premium valuations are likely to see higher book value
accretion with lower dilution as capital infusion is likely to come at close to current prices. Our
calculations indicate that the equity dilution for BoB is 10% and book value gets enhanced by
10% in FY2011 while our expected RoE falls from 25% to 23%. For the smaller public banks, the
impact is negligible, factoring their dilution at current price and capital raised. The impact on PBR,
post dilution and on our earnings estimates (excluding impact of capital infusion) is about 7% for
BoB, about 3-4% for OBC, Andhra Bank and Union Bank and about 1-3% for Allahabad, Dena,
Vijaya, PNB and Corporation.

Equity infusion will be at SEBI-determined formula
The equity infusion is likely to take place as a preferential allotment to the government at a price
(determined by SEBI formula) and it can be made at a price not less than the higher of the
following:
�� Average of the weekly highs and lows of the closing prices of the related shares quoted on the
stock exchange during the six months preceding the relevant date.
�� Average of the weekly highs and lows of the closing prices of the related shares quoted on a
stock exchange during the two weeks preceding the relevant date.