MOSL: FINANCIALS – BANKS-Government announces big bang capital infusion plan for PSBs-Too big to fail!

​Financials - Banks: Government announces big bang capital infusion plan for PSBs; Too big to fail!

• In an unexpected development (more because of the quantum) the government has announced a PSU Bank recapitalization plan amounting to INR2.1t (48% of PSU banks' current market cap). This will comprise - (i) front-ended capital infusion of INR1.35t to be funded via recapitalization bonds and (ii) INR760b of capital infusion from budgetary support and proposed capital raisings by the PSU banks, of which INR180b will be infused this year as part of the 'Indradhanush' plan.
  
• The government will allocate funds to the banks after analyzing their performance, size and capital requirements. While the details on the recapitalization bonds are yet to be announced, we believe that this move will help address the perennial capital constraints facing the PSU banks and also enable these banks to make the required provisions, thereby expediting the NPL resolution process.
  
• Of the total allocation of INR2.1t, we believe that INR750-800b will go toward meeting the Basel III capital requirements and supporting business growth, while the remaining ~INR1.3t can be utilized to make higher provisions. The government intent to clean up the banks and kick-start the lending process appears very strong, and thus, we believe that the recapitalization/clean-up initiative would remain a recurring theme over the next few quarters. Against this backdrop, we turn constructive on PSU banks, and will soon review our estimates/target prices.