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India Equity Research Reports, IPO and Stock News
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Banks/Financial Institutions
India
Infusion of capital finally takes shape. The government of India’s proposal to
infuse capital (`127 bn across various banks through preferential placement of common
equity) in various PSU banks is expected to be complete by March 2011. GoI indicated
in the Union Budget FY2012 that it would like to keep Tier-1 capital at a minimum of
8% and overall ownership at a minimum of 58% for all PSU banks. We see this as
positive for banks as the infusion helps improve CAR to fund loan growth, meet revised
Basel-3 requirements comfortably and cushions near-term margin pressure. Key
benefecaries are BoB, OBC, Dena Bank and UCO Bank.
Capital infusion to be complete by March 2011 as proposed in the budget
Of the total capital infusion announced (`202 bn) in the budget for FY2011, GoI will infuse `127
bn through preferential placement over the next few weeks across various public sector banks to
(1) help PSU banks maintain a Tier-1 ratio of at least 8%, (2) increase GoI’s stake to at least 58%.
The equity dilution is in the range of 1-17% across banks. The budget has allocated an additional
`60 bn for FY2012. We expect the net worth increase post the current infusion to be about 10%
across banks. Key beneficiaries would see an increase of about 18% in net worth, namely: BoB
with an infusion of `32.8 bn, OBC with `17.4 bn, Dena Bank with `5.6 bn and UCO Bank with
`9.4 bn.
In 1HFY11, GoI infused capital by subscribing to the preference shares of various mid-tier banks
and the preferential placement of IDBI Bank. It has given an in-principle approval to subscribe to
the rights issue of Central Bank of India.
Limited impact on book value or RoE; EPS impact of 5% for FY2012E
Most banks are trading closer to their FY2012E book, there would therefore be limited impact on
book value per share from this capital infusion. However, the infusion is at an average premium of
12% over CMP (SEBI pricing formula). EPS impact would be 5% for FY2012E. We see FY2012E
book value per share improving by 2% (BoB being the biggest beneficiary given the premium and
higher capital infusion). Average RoE impact would be about 130 bps but would still remain
attractive at 20% levels post dilution. Negative impact on RoE and EPS would be highest for OBC.
Quality of Tier-1 capital improves; note scope for raising capital from market at a later date
The current round of infusion has been through common equity, unlike previous instances of
capital infusion by GoI through preference shares. The current round is more expensive than
preference shares (cost at Repo+100 bps) but it addresses concerns on balance sheet leverage by
improving the quality of Tier-1 capital. Select banks have utilized most of their Tier-1 instruments
through innovative perpetual debt and preference shares. With a 58% minimum holding, capital
raising, if required at a later date, would become relatively easy. Importantly, this round of capital
infusion should boost confidence for PSU banks and shift focus on growth rather than capital
preservation. Near-term benefits on margins would be visible, especially for OBC, BoB, Dena Bank
and UCO Bank.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks/Financial Institutions
India
Infusion of capital finally takes shape. The government of India’s proposal to
infuse capital (`127 bn across various banks through preferential placement of common
equity) in various PSU banks is expected to be complete by March 2011. GoI indicated
in the Union Budget FY2012 that it would like to keep Tier-1 capital at a minimum of
8% and overall ownership at a minimum of 58% for all PSU banks. We see this as
positive for banks as the infusion helps improve CAR to fund loan growth, meet revised
Basel-3 requirements comfortably and cushions near-term margin pressure. Key
benefecaries are BoB, OBC, Dena Bank and UCO Bank.
Capital infusion to be complete by March 2011 as proposed in the budget
Of the total capital infusion announced (`202 bn) in the budget for FY2011, GoI will infuse `127
bn through preferential placement over the next few weeks across various public sector banks to
(1) help PSU banks maintain a Tier-1 ratio of at least 8%, (2) increase GoI’s stake to at least 58%.
The equity dilution is in the range of 1-17% across banks. The budget has allocated an additional
`60 bn for FY2012. We expect the net worth increase post the current infusion to be about 10%
across banks. Key beneficiaries would see an increase of about 18% in net worth, namely: BoB
with an infusion of `32.8 bn, OBC with `17.4 bn, Dena Bank with `5.6 bn and UCO Bank with
`9.4 bn.
In 1HFY11, GoI infused capital by subscribing to the preference shares of various mid-tier banks
and the preferential placement of IDBI Bank. It has given an in-principle approval to subscribe to
the rights issue of Central Bank of India.
Limited impact on book value or RoE; EPS impact of 5% for FY2012E
Most banks are trading closer to their FY2012E book, there would therefore be limited impact on
book value per share from this capital infusion. However, the infusion is at an average premium of
12% over CMP (SEBI pricing formula). EPS impact would be 5% for FY2012E. We see FY2012E
book value per share improving by 2% (BoB being the biggest beneficiary given the premium and
higher capital infusion). Average RoE impact would be about 130 bps but would still remain
attractive at 20% levels post dilution. Negative impact on RoE and EPS would be highest for OBC.
Quality of Tier-1 capital improves; note scope for raising capital from market at a later date
The current round of infusion has been through common equity, unlike previous instances of
capital infusion by GoI through preference shares. The current round is more expensive than
preference shares (cost at Repo+100 bps) but it addresses concerns on balance sheet leverage by
improving the quality of Tier-1 capital. Select banks have utilized most of their Tier-1 instruments
through innovative perpetual debt and preference shares. With a 58% minimum holding, capital
raising, if required at a later date, would become relatively easy. Importantly, this round of capital
infusion should boost confidence for PSU banks and shift focus on growth rather than capital
preservation. Near-term benefits on margins would be visible, especially for OBC, BoB, Dena Bank
and UCO Bank.
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