Raising capital from public sector banks is necessary but not sufficient


India’s public sector lenders are raising capital. In recent months, several lenders have either raised funds or announced their intention to do so through Qualified Institutional Placement (QIP).

Union Bank of India cleaned up ??1,447 crore thanks to a QIP in July, while Canara Bank raised a sum of ??2,500 crore earlier this month. Bank of India announced a QIP issue of ??3000 crore with a floor price of ??66.19 per share. Insufficient capital in the wake of high non-performing assets (NPAs) has been an affliction of public sector banks in recent years. Before the coronavirus outbreak, some lenders had slipped below the minimum regulatory requirement on capital adequacy ratios.

Faced with a chronic capital shortage, 10 public sector banks were merged to form four large banks in FY20. The synergies from the mergers are now starting to benefit lenders and ultra-low interest rates have meant as heavy deposit lenders reap the benefits of low cost of funds.

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Lenders reported strong performance in FY21, a year ravaged by the pandemic. The increase in profitability has also improved capital adequacy ratios, along with mergers.

Now, lenders want to further strengthen their capital for growth purposes. With a long-standing issue being resolved, one would expect ratings to improve for lenders. However, even today, with the exception of the largest lender, the State Bank of India (SBI), the shares of most public sector lenders are trading at a steep discount to their estimated book value one year. in advance.

Indeed, we still do not know how much stress from the pandemic would emerge on bank balance sheets. Fresh capital is likely to flow into growth, but lending opportunities have narrowed after the pandemic.

In addition, incremental provisioning needs may not drop dramatically for public sector banks. So some of the proceeds from QIPs may end up being used to ward off stress. Take the case of Canara Bank. The lender has raised ??2,500 crore via QIP on August 24 at ??149.65 per share.

“We believe that the capital increase will mainly strengthen its capital ratios, which remain below average compared to their peers after the merger with Syndicate Bank,” said analysts at Emkay Global Financial Services Ltd in a note from August 25.

Certainly, lenders can reap benefits from resolving insolvency accounts, thereby reducing the need for more capital. But until they demonstrate both growth and high capital ratios, valuations won’t improve much from here on out.

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