The Indian government may have to increase its capital infusion to state-owned banks if lenders are unable to sell additional Tier 1 bonds in the financial year that begins April 1, analysts said. In the interim budget announced on Monday, the government said it will inject Rs 112bn (US $1.8bn) of capital in the state-run banks. Typically, the government's capital infusion is for common equity Tier 1.
According to estimates from India Ratings & Research, the local arm of Fitch, India's state-owned banks will need about Rs 68bn in the next financial year to maintain their existing minimum common equity Tier 1 levels. The banks, which constitute nearly 70% of the industry in terms of assets, however will require between Rs 250bn and Rs 360bn to maintain their total minimum Tier 1 ratio of 8% in 2014-2015, according to Moody's.
That amount includes Additional Tier 1 capital and is 1% higher than the 7% regulatory floor under the new banking regulation in India. The Reserve Bank of India's Basel III regulations require Indian banks to have a minimum total capital of 9.625% as a percentage of risk weighted assets as of March 31, 2015 That includes minimum common equity Tier 1 capital of 5.5%, minimum additional Tier 1 capital of 1.5%, a capital conservation buffer of 0.625% and Tier 2 capital of 2%.
The capital injection of Rs 112bn will be sufficient to cover the minimum common equity Tier 1 needs of state-run banks as it keeps the average common equity tier 1 ratio of state-run banks above 8% - it is currently between 7.5%-8.0%, according to India Ratings -, but the remaining additional Tier 1 needs would have to be met some other way. "Since there is no ready market for the additional Tier 1, the government will have to take a mid-year call to supplement this and increase the overall capital infusion in its banks," said Ananda Bhoumik, senior director, India Ratings & Research.
India's biggest lender, State Bank of India, is the only state-run bank so far to have successfully raised equity under the Basel III requirements, which came into force last April. SBI's Rs 1.3bn equity offering last month, however, is not a great precedent for other lenders. The offering was finalised at a lower price and volume than it originally targeted.
SBI sold 51.2m shares, short of its intended 58.9m share target. The placement priced at Rs 1,565, at the bottom of the Rs 1,565-Rs 1,580 price range. The qualified institutional placement of SBI was subscribed 70% by domestic banks and insurance companies, with Life Insurance Corp of India buying almost US $450m.
"Most other public-sector banks trade at valuations below SBI, indicating that markets are not yet receptive to further equity offerings from these banks," Moodys said in a note today. Institutional investors including insurers, pension funds and provident funds buy equity offerings or additional Tier 1 from state-owned banks. These institutional investors, however, have limits on the amount of assets they can own from a single name, and they have rating caps.
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