FREE

Event update: Financials - Capital Infusion BoB and Canara left out

The government has announced recapitalization of Rs482bn for 12 state banks. SBI / BoB / IDBI / Canara are the large banks that have not received any capital. IDBI’s capital requirements will now be looked after by LIC. SBI plans to raise funds from the capital market. BoB will need capital from the government for the merger. Of the total proposed recap of Rs1.06 trn for FY19, only Rs178bn is pending. We hope a part of that goes to BoB who will needs funds for the merger.

Objectives of the current recap announcement. Of the total recap of Rs482bn:

• Rs170bn will go to banks to ensure they do not fall under PCA
• Rs48bn will go to banks that have exited PCA and need infusion to remain above PCA triggers
• Rs149bn will go to banks to ensure they do not fall under PCA
• The remaining will go to those state banks that are under PCA to ensure that they meet minimum regulatory requirements

Huge infusion in Corporation and Allahabad: The amount of infusion for Corporation Bank at Rs91bn and Allahabad Bank at Rs69bn is huge. We believe these banks will be eventually merged with bigger banks. If BJP returns to power, we expect at least two (3 way) mergers in the next 12 months.

Focus on SME lending: With capital infusion and state banks coming out of PCA, we believe state owned banks can start lending again. The focus will be on lending to the SME and retail segments.

Continue to prefer private banks: Even with the infusion, the financial position of state banks remains weak. Also at current prices, dilution will be huge. As such we continue to prefer private to state banks. Whether BoB gets the required capital infusion by year end is a key monitorable.