Banking - Increase in risk weight on investments: Minimal impact; sector update ::Edelweiss

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RBI has increased capital requirement (from 100% to 125% risk weight) for banks’ equity investment in financial entities which are exempted under the Capital Market Exposure (CME) category (refer list on Page 2). These guidelines apply to equity investments where banks’ shareholding is less than 30% in the investee company. Hence investments in subsidiaries/JVs - which explain a large part of banks’ equity exposures - are not impacted, translating into a minimal impact for the industry due to the revised guidelines. ICICI Bank, specifically, is a case in point with its high equity investments book at INR159bn, but accounting for just INR200mn under equity investments in non-CME financial entities which are now witnessing increased risk weights. Hence the increase in capital requirements will be a mere INR4.5mn for the bank.

Increased capital requirements to impact small segment

Increase in capital requirements for equity investments in financial entities - not classified under CME to 125% from the earlier 100% - now brings uniformity across equity investments by a bank (whether in financial or non-financial entity/CME or non-CME entity) where its shareholding is less than 30% in the investee company. Investment in subsidiaries/JVs (other than that in Insurance ventures) where holding is in excess of 30% is reduced from banks’ Tier 1 and Tier 2 capital (50% each) on the standalone basis hence the question of risk weights on investments does not arise.

Negligible impact seen on ICICI Bank

Within our coverage universe, ICICI Bank and SBI have substantial equity investments as a percentage of the net worth at 29% and 24% respectively hence we have dealt with them individually as mentioned below. Kotak Mahindra Bank is another entity which has various businesses under its subsidiaries, namely life insurance and capital market businesses among others though equity investment as a percentage of net worth stands at a mere 6% for the bank.

ICICI bank: The bank carries INR159bn worth of equity investments as on FY11. Of this, INR125bn (~78%) is attributable to investment in subsidiaries/JVs on account of which capital deduction is taken from Tier-1 and Tier-2 capital. From the rest, only INR200mn is on account of equity investments in non-CME financial entities (where shareholding is below 30%) which translate into a negligible capital adequacy impact at INR4.5mn.

SBI: Of the INR2.95tn worth investments, a mere 5% is towards equity. Of this, a large part is towards subsidiaries and JVs at 42%. Hence the impact of increased capital requirements will not be substantial on an overall level.