PSU banks line up to raise funds after recapitalisation plan, Moody’s rating upgrade

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Mumbai: Public sector banks are queueing up to raise funds from the equity market, especially through qualified institutional placements (QIPs) against the backdrop of improved investor sentiment on account of the government’s bank recapitalisation plan and a recent upgrade of India’s sovereign rating by Moody’s Investors Service.

After the government announced the Rs2.11 trillion bank recapitalisation plan in October, PSU banks have announced plans to raise more than Rs13,000 crore through QIPs since 24 October as against a total of Rs8,419 crore raised in the last four years.

On Tuesday, Bank of Baroda’s board approved fund raising up to Rs6,000 crore through QIP or rights issue, the bank stated in a stock exchange notification. Union Bank of India has also started its roadshows in Singapore, Hong Kong, London and New York to raise Rs2, 000 crore. According to a PTI report dated 6 November, Sunil Mehta, managing director and chief executive of Punjab National Bank said the bank had received board approval for raising up to Rs5,000 crore through a QIP and that the bank will be accessing the market in the next few months. Bank of India is also planning to raise another Rs500 crore during the current fiscal year.

According to investment bankers and analysts, the announcement of the recapitalisation plan by the government, along with the Moody’s upgrade has influenced investor appetite positively.

“The rating upgrade and recapitalisation were definitely a big positive. Even though the government is yet to announce how the recapitalisation bonds will be issued, the intent to recapitalize the public sector banks is very clear. We will see these lenders accessing the market during before the end of current fiscal year,” said Rajeev Varma, head—financial institutions group, investment banking at Edelweiss Financial Services Ltd. The lenders will raise the money keeping in mind a time frame of 18-24 months.

The banks are expected to raise funds on their own as well. Last month, the government announced a Rs2.11 trillion recapitalisation programme for public sector banks. Out of the total commitment, Rs1.35 trillion will come from the sale of so-called recapitalisation bonds. The remaining Rs76,000 crore will be through budgetary allocation and fundraising from the markets. Banks are confident about raising funds.

“The investor appetite has improved for public sector banks since the recapitalisation programme was announced. Union Bank of India is expecting that the entire issue will be lapped up by the investors and it will not have to bank on Life Insurance Corp. for bailing out its QIP,” said a person with direct knowledge of the issue, requesting anonymity. The person added that there was a lot of interest among the investors, especially in Singapore. Rajkiran Rai G., chief executive and managing director at Union Bank, declined to comment.

Foreign investors may, however, be interested in the top three or four PSU banks, said Subhrajit Roy, executive director at Kotak Investment Banking, as they assume most of the benefit due to recapitalisation will accrue to the bigger banks. “Recapitalisation announcement has brought all the public sector banks in focus. Earlier, foreign institutional investors only looked State Bank of India, now they are actively considering investment in the other bigger lenders,” Roy said, adding that FIIs which missed the PSB rally after the announcement will try to get in through the QIP route.

According to Prime Database, a primary market tracker, during the current fiscal public sector banks have raised over Rs16,000 crore through QIP of which SBI’s issue alone was worth Rs15,000 crore. Now, more banks are coming forward to tap the equity market.

The amount envisaged in the recapitalisation programme will not be sufficient to spur growth and the lenders would need capital over and above that announced by the government. India Ratings and Research has pegged the overall capital requirement for PSU banks at Rs2.5 trillion as against Rs2.1 trillion announced by the government.

“From the Rs2.5 trillion, Rs1.6 trillion will be required to step up the provision on recognized stressed assets from 35% to 55% which is our sense would be the blended haircut across sectors. Rs0.55 trillion would be required to adhere the Basel III capital requirement up to fiscal year 2019 and another Rs0.35 trillion additional provisioning arising out of implementation of Ind-As in the next financial year. Clearly, the capital announced by the government is not enough to fund growth and clean bank balance sheet simultaneously,” said Udit Kariwala, senior analyst, India Ratings and Research. Banks will need to raise additional capital through either the QIP route or monetization of non-core assets to fend for higher credit growth, he added.

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