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India Equity Research Reports, IPO and Stock News
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Banks/Financial Institutions
India
Basel 3 transition ought to be smooth. We believe Indian banks are well positioned
to move towards Basel 3 guidelines, and the banks are expected to make the transition
by March 2017, ahead of international timelines. Banks would need to keep 11.5% as
overall CAR with tier-1 capital at 9.5%. Focus is on maintaining a higher share (8%) in
the form of common equity. Capital to fund growth, higher core-equity and CAR
requirements are likely to moderate banks’ RoEs from current levels.
RBI looks at an early transition coupled with being more conservative
The draft guideline on Basel 3 implementation is likely to see the transition for Indian banks
completed by March 2017- couple of years ahead compared to international guidelines. We note
that banks would need to maintain higher core equity capital. Total CAR initially needed would be
9% (same as Basel 2) and 11.5% (including a capital conservation buffer) by March 2017 with
another 0-2.5% of capital during counter-cyclical periods. Banks would need to have a minimum
of 8% common equity (5.5% core equity + 2.5% capital conservation buffer) and 1.5% of
additional tier-1 equity taking the total tier-1 equity to 9.5%. Leverage ratio has been introduced
at 5% of assets (including off balance sheet) as an additional measure for risk management. We
expect higher volatility in overall CAR as common equity will be the core of for measurement.
Smooth transition expected with capital for growth as against meeting regulatory requirements
We believe most Indian banks should be able to meet the new guidelines as their tier-1 ratios are
fairly comfortable and banks have a five-year transition period. The comfortable tier-1 ratios of 8-
9% for private banks will now be revised upwards to about 10% under the new guidelines. Most
public banks are likely to raise capital over the next few years as they would need capital for
balance sheet growth though they currently meet the revised guidelines. GoI could also resort to
converting its preference shares, infused in various banks over the past few years, into equity.
Higher core equity, leverage ratios and inadmissible instruments likely to moderate RoEs
A combination of higher core equity, leverage ratio and phasing of inadmissible instruments is
likely to moderate RoEs for public and private banks. Banks would need to be a lot more efficient
in managing their capital structures in this environment. Risks highlighted in public banks for their
higher RoEs through leverage are being addressed through the current guideline, which is positive
from a valuation perspective, though it is at the cost of lower RoEs. Capital needed for balance
sheet growth as well as risk emerging from volatile capital markets would imply private banks
being a lot more conservative than they are, which could risk RoEs and current multiples. Indian
banks have delivered RoEs of about 15% over the past few years and our estimates indicate that
every additional 100-120 bps of increase in core equity is likely to impact RoEs by 150-180 bps
(excludes the positive impact of NIM expansion).
Changes to dividend payout ratios and capital charges for investments/securitisation
The dividend payout ratio looks to have been revised and could allow banks to pay out 100%
earnings against 40% under the current guidelines. RBI is likely to restrict dividend and
performance payouts for employees when capital (common equity) is below the required limits but
will not penalize the business operations. Investments in subsidiaries and securitisation related
exposures have been risk-weighted as against a charge on tier-1 and tier-2 capital, which is
positive for ICICI Bank and banks with excess capital.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks/Financial Institutions
India
Basel 3 transition ought to be smooth. We believe Indian banks are well positioned
to move towards Basel 3 guidelines, and the banks are expected to make the transition
by March 2017, ahead of international timelines. Banks would need to keep 11.5% as
overall CAR with tier-1 capital at 9.5%. Focus is on maintaining a higher share (8%) in
the form of common equity. Capital to fund growth, higher core-equity and CAR
requirements are likely to moderate banks’ RoEs from current levels.
RBI looks at an early transition coupled with being more conservative
The draft guideline on Basel 3 implementation is likely to see the transition for Indian banks
completed by March 2017- couple of years ahead compared to international guidelines. We note
that banks would need to maintain higher core equity capital. Total CAR initially needed would be
9% (same as Basel 2) and 11.5% (including a capital conservation buffer) by March 2017 with
another 0-2.5% of capital during counter-cyclical periods. Banks would need to have a minimum
of 8% common equity (5.5% core equity + 2.5% capital conservation buffer) and 1.5% of
additional tier-1 equity taking the total tier-1 equity to 9.5%. Leverage ratio has been introduced
at 5% of assets (including off balance sheet) as an additional measure for risk management. We
expect higher volatility in overall CAR as common equity will be the core of for measurement.
Smooth transition expected with capital for growth as against meeting regulatory requirements
We believe most Indian banks should be able to meet the new guidelines as their tier-1 ratios are
fairly comfortable and banks have a five-year transition period. The comfortable tier-1 ratios of 8-
9% for private banks will now be revised upwards to about 10% under the new guidelines. Most
public banks are likely to raise capital over the next few years as they would need capital for
balance sheet growth though they currently meet the revised guidelines. GoI could also resort to
converting its preference shares, infused in various banks over the past few years, into equity.
Higher core equity, leverage ratios and inadmissible instruments likely to moderate RoEs
A combination of higher core equity, leverage ratio and phasing of inadmissible instruments is
likely to moderate RoEs for public and private banks. Banks would need to be a lot more efficient
in managing their capital structures in this environment. Risks highlighted in public banks for their
higher RoEs through leverage are being addressed through the current guideline, which is positive
from a valuation perspective, though it is at the cost of lower RoEs. Capital needed for balance
sheet growth as well as risk emerging from volatile capital markets would imply private banks
being a lot more conservative than they are, which could risk RoEs and current multiples. Indian
banks have delivered RoEs of about 15% over the past few years and our estimates indicate that
every additional 100-120 bps of increase in core equity is likely to impact RoEs by 150-180 bps
(excludes the positive impact of NIM expansion).
Changes to dividend payout ratios and capital charges for investments/securitisation
The dividend payout ratio looks to have been revised and could allow banks to pay out 100%
earnings against 40% under the current guidelines. RBI is likely to restrict dividend and
performance payouts for employees when capital (common equity) is below the required limits but
will not penalize the business operations. Investments in subsidiaries and securitisation related
exposures have been risk-weighted as against a charge on tier-1 and tier-2 capital, which is
positive for ICICI Bank and banks with excess capital.
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