Banks' rights issue may miss investor appetite

Last Updated: Mon, Dec 03, 2012 22:00 hrs

Despite the finance ministry asking public sector banks to opt for rights issue, some of the banks may still want direct equity infusion from the government, as they are not sure of investor appetite.

The government has budgeted Rs 15,000 crore capital infusion in public sector banks for the current financial year. Unlike last year, when the government and the Life Insurance Corporation infused equity and increased stake, this time the government wanted a rights issue. However, the proposal asking public sector banks to come out with rights issue to raise fresh capital is likely to fall short of target by a long mile. This is because the current market capitalisation of a government bank is a fraction of their capital requirements.

For instance, State Bank of India’s, country’s largest lender, the current market capitalisation is just 8.7 per cent of its assets at the end of March 2011. So, even if the bank dilutes its equity capital by 20 per cent, the amount raised by it would be equivalent to less than two per cent of its assets. In contrast, SBI’s gross non-performing asset as a proportion of its assets was five per cent at the end of the 2011-12 financial year.

A view of how government and private banks stand (Rs  cr)
Public sector banks
Bank Total assets Market cap M-cap as %
of assets
SBI 16,78,910.8 1,45,619.0 8.7
Bank of Baroda 4,44,730.3 31,579.60 7.1
PNB 4,54,802.0 26,646.0 5.9
Canara Bank 3,63,486.7 20,590.6 5.7
Bank of India 3,71,709.6 16,111.7 4.3
IDBI Bank 2,81,259.1 13,819.7 4.9
Union Bank (I) 2,53,819.9 13,345.3 5.3
Oriental Bank 1,72,309.0 9,829.4 5.7
Indian Bank 1,34,934.9 7,871.2 5.8
Syndicate Bank 1,76,566.5 7,683.9 4.4
All govt banks 60,35,950.6 3,52,130.3 5.8
Pvt sector banks
Bank Total assets Market cap M-cap as % of assets
HDFC Bank 3,03,084.5 1,66,455.4 54.9
ICICI Bank 5,04,523.6 1,26,676.3 25.1
Axis Bank 2,76,741.1 56,196.3 20.3
Kotak Mahindra Bank 78,591.30 49,735.2 63.3
IndusInd Bank 55,565.90 19,619.3 35.3
All private banks 16,68,879.8 4,75,669.1 28.5
Source: Capitaline, Compiled by BS Research Bureau

Market participants said the investor sentiment towards GOVT stocks took a beating after the Hindustan Copper share sale issue. “The sentiment towards GOVT stocks was dented following the Hindustan Copper’s offer for sale issue, which was saved by the Life Insurance Corporation and public sector banks at the last moment,” said an analyst with domestic broking houses.

The market capitalisation to assets ratio is also poor, for tier-II and tier-III public sector banks may actually exceed their gross NPA figures. For example, Central Bank of India’s current market capitalisation is just 2.6 per cent of its assets at the end of FY12. So, even if the bank dilutes its equity by 100 per cent in a rights issue, the amount raised may not meet its capital requirements.

Banks will need capital not only to support growth but also to meet Basel-III guidelines, which come into effect from January 1, 2013. Public sector banks — which control over 70 per cent of the market — will need Rs 1.5 lakh crore additional capital to comply with the Basel-III norms, to be implemented over the next five years.

The implications are clear. The government cannot bank on equity investors — domestic or foreign — to plug the holes in the balance sheets of public sector banks. The ball will ultimately fall in the promoter’s court and the government will have fork out money to recapitalise banks. It will be a replay of what has happened during the rights issue of Tata Motors (in 2008) and Hindalco Industries (in 2010). In both these instances, non-promoter’s shareholders refused to subscribe to their part of shares and the issues were finally rescued by respective promoters.

The same is happening in Europe where governments are being forced to recapitalise and equity markets refuse to pick the tab.

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