PSU banks are fast approaching perform or perish zone
The government is moving cautiously in providing funds to the banks. After infusing Rs 14,500 crore in FY14, FY15 infusion was lowered to Rs 7,700 crore vs budget proposal of Rs 11,200 crore. The budgetary allocation for FY16 has been fixed at Rs 7,900 crore. Jefferies points out that a quick and large capital infusion would have helped sentiment, but capital in itself is not a means to an end. Banks need to use this capital diligently and efficiently.
PSU banks are now in such a situation that recapitalisation of banks is no longer an option, it's a certainty; however, capital will come with its own riders. The report says that monetisation of non-core assets will gain momentum. Most of the PSU banks have investments in non-core assets which can be divested to raise capital.
Jefferies feels that government capital allocation will include riders on how banks should generate funds through sale of non-core assets. Though not all assets are sale worthy, but the need to unlock value from the non-core assets have never been higher than it is today. Around $8 billion or roughly Rs 52,000 crore worth of value can be unlocked through sale of non-core assets, says the Jefferies report.
Share of non-core assets as a percentage of market capitalisation is the highest in the case of IDBI which stands at 57 per cent followed by Bank of India whose non-core assets account for 20 per cent of the market capitalisation.
Among the non-core assets that can be freed for sale; investment in insurance companies’ accounts for 40 per cent of the banks total investments. Investments in financial institutions account for 26 per cent while 16 per cent is invested in stock exchanges and asset management companies.
Sale of non-core assets however, will not be enough to meet the capital requirements of banks. Over the next four years, banks will need to have a capital base of $166 billion to meet the Basel III norms. Out of this Jefferies says that banks have a current capital base of $76 billion with a possibility of internal capital generation of US$38bn in next four years. Taking into account the cost of repairing its balance sheet (writing off toxic assets) and a higher Return on Equity (RoE) generation by banks and a 15 per cent dividend pay-out, additional capital support required by banks to fund 17 per cent risk weight asset growth over FY16-19 (four years) is roughly US$30 billion or Rs 1,87,100 crore.
Given the challenges of raising capital for the PSU banks, analysts prefer private banks. Unless PSU banks do something out of the box, they would continue to trade at a discount to the private sector peers. The strong performers will in any case not have a problem in raising capital. PSU banks are fast approaching perform or perish zone.