Capital-hungry banks seek MF backing for $3-bn QIPs

Illustration by Ajay Mohanty
Public sector banks (PSBs) are seeking the backing of mutual funds (MFs) to ensure smooth sailing of their qualified institutional placements (QIPs). Over half a dozen sate-owned banks will soon tap the market for equity fundraising worth Rs 18,300 crore (nearly $3 billion).

Approaching institutional investors ahead of a fundraising programme, ‘roadshow’ in market parlance, is a common practice. However, some banks are said to have asked MFs to mandatorily participate in the programme.

“We have been approached by four PSBs asking to invest in their QIPs. Some bank officials even said if we don’t invest, they would redeem existing investments from our debt schemes or stop future investments,” said an official with an asset management company (AMC). The official said the diktat might not impact large fund houses as much, but had worried smaller AMCs.

Business Standard reached out to some of the senior PSB officials, who admitted meeting fund houses. However, denied putting any pressure on them to participate in their QIP programme.

Most banks are going for equity issuances to meet the Reserve Bank of India’s (RBI’s) new capital adequacy norms. According to the new rules, banks have to maintain tier-1 capital of at least seven per cent of their total risk weighted assets (RWAs) by March 2018. Further, the minimum capital requirement (including capital conservation buffer) is set at 11.5 per cent of RWAs by March 2019.

Punjab National Bank and Bank of Baroda have obtained approvals to raise up to Rs 5,000 crore and Rs 6,000 crore, respectively, through QIPs. Bank of India and Union Bank of India are looking to raise up to Rs 3,000 crore and Rs 2,000 crore, respectively. Meanwhile, Bank of Maharashtra launched its Rs 300-crore QIP on Wednesday.

Industry players say MF participation will be key for the success of these QIPs.

“Most overseas investors are wary of relatively smaller PSBs. LIC (Life Insurance Corporation of India) has already exhausted its investments limits on most of the PSBs. Given this, MF investments are imperative for the fundraising exercise. Given strong inflows this year, most MFs have the wherewithal to invest,” said an official with a brokerage.

While, MFs have been big buyers in the market this year, they have largely remained under-invested in PSB stocks, barring State Bank of India (SBI). Concerns over asset quality, sluggish growth and depressed profitability have kept domestic funds at bay from PSB stocks. This has led to a severe underperformance of PSB banking stocks vis-à-vis the broader market. So far this year, the Nifty PSU Bank index has gained 24 per cent. In comparison, the Bank Nifty index, a gauge for the performance of the country’s top banks, has gained 38 per cent.

Most of smaller PSBs are currently trading at a huge discount to their book value. For instance, Union Bank of India, Allahabad Bank, Andhra Bank and Bank of Maharashtra are trading at less than half of their 2016-17 book value.

Some mutual fund officials said they were not averse buying shares, given depressed valuations and hopes of a turnaround.

“The Street is pinning hopes on the government’s recapitalisation plan to revive the health of the PSBs. Some banks could see huge turnaround if things go as planned. It isn’t a very bad time for having exposure to certain stocks in this space,” said a fund manager.

Sources: NSE, BSE, brokerage reports

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