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MOSL: FINANCIALS - BANKS: Government injects a booster dose for capital-starved PSBs

Financials - Banks: Government injects a booster dose for capital-starved PSBs

 

• In a vital step forward toward recapitalizing public sector banks (PSBs), the Indian government has announced the capital infusion roadmap and the framework for improving governance.
• While focusing on improving the credit risk assessment and monitoring framework, the government also intends to better meet credit needs of MSMEs. The GoI, thus, announced to infuse INR881.4b in 20 PSBs (barring Indian Bank, presumably because of its existing healthy capitalization level) in the form of recapitalization bonds of INR800b and budgetary allocation of INR81.4b. PSBs are expected to raise INR103b from the market, taking total recapitalization to ~INR1t in FY18.
• Allocation toward 11 banks under the prompt corrective action (PCA) category stands at INR523b (18.8% of their total net NPA), while that toward non-PCA banks stands at INR358b (8.8% of total net NPA).
• We also note that post this round of capital infusion, the CET1 ratio for all PSU banks would reach 8.5%+, with net stressed assets reducing to 102% of net worth from 117% earlier. The capital infusion will, thus, enable PSBs to cleanse their balance sheets and make incremental provisions toward the upcoming NCLT resolutions. SBI and BoB remain our top picks within the PSU banking space.