Banking - RBI's draft guidelines on Basel III norms - relatively more stringent; :: Edelweiss

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The Reserve Bank of India (RBI) has released draft guidelines on implementation of Basel III framework which are more stringent compared to those issued by the Basel Committee on Banking Supervision in December 2010 (refer table 1 & 2). The central bank’s norms require higher capital ratios (particularly common equity tier 1 capital at 5.5% against 4.5%, which leads to higher minimum Tier 1 capital at 7% and minimum total capital ratio at 9%). Deductions with respect to goodwill, intangibles, pension liability gap are to be adjusted from common equity capital (CEC) compared to Tier 1 ratio followed currently. Even the transition period has been shortened with requirement for capital conservation buffer being brought forward to March 2014 and 100% phase in of all deductions from CEC to be achieved by March 2016.

Impact analysis

We believe the proposed Basel III norms will stress the capital requirement for PSU banks and impair their ability to enjoy excessive leverage which had enabled them to report healthy RoEs despite weak RoA profile:

·         Asset quality risk and increase in downgrades of Indian corporates by rating agencies is leading to higher capital consumption for some banks.

·         Government commitment to recapitalize PSU banks in the near term will be impacted due to the tight fiscal situation.

·         PSU banks were increasingly resorting to IPDI, preference share capital to meet Tier 1 capital.

In a bid to conserve core capital to meet the revised requirements, we believe PSU banks will follow a more cautious approach to growth, thereby benefiting private banks. Reworking Tier 1 capital based on Basel III norms prescribed by RBI (refer table 3) suggests that stress on CEC will be higher for PSU banks like UCO, Vijaya, United etc., and IDBI, followed by Yes Bank, amongst private banks as their reliance on hybrid debt is relatively higher. ICICI Bank will witness some release of capital at the consolidated level  as investments of INR49.4bn in insurance subsidiaries which were earlier knocked off to the extent of 50% from Tier 1 capital, will now be assigned 250% risk weights. Stress on CEC recalculated factoring in the following will appear bloated as we have considered FY11 networth as base (not factoring in internal accruals for FY12-13):

·         Knocking off deductions with respect to goodwill, intangibles, defined benefit pension assets (unamortized second pension option liability) from CEC.

·         Rather than deducting 50% investment in subsidiaries from Tier 1, we have assigned higher risk weights to entire investments assuming cumulative investment is less than 10% of a bank’s networth (as prescribed).