Even as State Bank of India (SBI) gets ready to launch a massive fund raising plan ? it had secured shareholders? nod on Monday ? the street views the move as ?too little, too late?, further stating the worse for SBI and other state-owned banks may not be over.
SBI’s plan to infuse nearly R11,500 crore may be a positive step as it improves tier-I ratio by around 80 basis points (bps), the bank’s tier-I ratio of 9% will remain one of the lowest amongst large Asian and Indian peers, analysts say. According to analysts, apart from the proposed capital infusion, there is an additional capital requirement of R50,000 crore ($8 billion) until FY18, assuming 15% risk-weighted asset growth and 10% common equity tier-I capital ratio as of
FY18. Further, FY15 earnings estimates are likely to be under pressure and SBI may need a meaningful pick-up in growth to get out of NPL problem.
However, NPL recovery is believed to take time, analysts said, citing weaker loan growth, weaker NIMs, weaker fees and higher costs.
The country’s largest lender by assets, SBI received shareholders approval to raise R9,576 crore via QIP to augment tier-I capital ratio under Basel III to over 9% and its overall capital-adequacy to 12%. As on September 30, SBI’s Basel III capital adequacy ratio stood at 11.69% of which Tier I was at 8.73%.
While the pricing is yet to be confirmed, the street estimated the price to be in the range of R1,650 to R1,800 per share and the price will determine the number of fresh shares that the company will issue. As per calculations, SBI cannot price its issue below R1,624 per share as it will cause the promoter holding to fall below 58%.
In its December 9 stock exchange announcement, SBI had said it will ?raise R9,576 crore of equity in FY14 by way of QIP with the condition the government’s holding shall not drop below 58%.”
Assuming the issue price is fixed at R1,625 per share, SBI will have to issue 5.89 crore fresh shares. Post the issue the government holding will drop to 58.004%, while public shareholding will increase to 41.994% from 37.079% at present. SBI shares closed at R1,761.10 per share on the Bombay Stock Exchange on Monday, down 0.5 or R8.80 from the previous close.
US-based investment banking and multinational financial services firm, Morgan Stanley has an ?underweight? rating on the stock with a 30.5% downside to their target (R1,225 per share) citing expensive valuations and sluggish growth outlook.
?Our view is unchanged, even after the capital issue. Multiples will be under pressure as revenue growth slows and asset quality pressures increase. Revenue progression is likely to be tepid given slowdown in economic growth. Asset quality will likely remain under pressure, given peak lending rates and slowing growth,? Morgan Stanley analysts Anil Agarwal said in his research note.
In its report, Morgan Stanley said the stock trades at 0.9 times its FY14e consolidated book value (P/Bv), which is expensive in the context of a weak balance sheet and an average 6% underlying return on equity (RoE) for FY14-16e.
Analysts said, SBI is not the only state-owned bank to be facing headwinds. Investors are not enthused with the manner in which state-owned banks are aggressively lending to troubled sectors, especially the power sector, implying that they are potentially taking most of the incremental problem loans being generated in India
According to Morgan Stanley, even as some of the private sector banks have contracted their exposure to power sector, state-owned banks (excluding SBI) increased their exposure by 34% CAGR between 2009 and 2012. SBI increased its exposure by 37% as it impacted valuations.
