Capital raise isn't a reason to turn optimistic on banking stocks

Rating agency Crisil threw a googly earlier this week that 75 per cent of companies accessing moratorium are sub-investment grade.
The Nifty Private Bank index has gained 15 per cent in three months, against the 13.7 per cent rise in the Nifty. The sum of Rs 47,000 crore raised by six banks since May has propped up sentiment. Their ability to raise such a large amount in a short span and even bring in quality overseas investors is testimony of their attractiveness for large investors. But for the rest, the small and retail investors, deployment of this capital should be seen microscopically before turning positive on banking stocks.

For one, despite May to August being busy months of capital raising by banks, the governor of the Reserve Bank of India has emphasised more than once that capital will remain critical for the banking system. Second, how slippages or accretion of bad loans would shape up and provisioning costs bulge remain unknown. Rating agency CRISIL threw a googly earlier this week that 75 per cent of companies accessing moratorium are sub-investment grade. Also, despite the moratorium, analysts say the retail gross non-performing asset ratio breached the 1-1.2 per cent comfort threshold by 35-40 basis points (bps) year-on-year (YoY) in the June 2020 quarter.


Suresh Ganapathy of Macquarie Capital estimates credit costs of 700 bps over the next three years for private sector banks, assuming they will roughly restructure 10-15 per cent of the loan book. “Covid-related provisions will be around 350-400 bps of the 700 bps and the balance will be from the normal course of business,” he adds. With the restructuring of loans kicking off soon, he warns it will increase the opacity of financials and the balance sheet of banks may not reflect the true nature of the book.

Banks, so far, have managed to increase their tier-1 capital adequacy by 120-230 bps; YES Bank being an outlier. In a normal scenario of 15-20 per cent growth, this capital would be enough to provide for bad loans and expand the business. But, with July’s non-food credit growth at a tepid 6.7 per cent (that is, in a bleak growth scenario), the advantage of the multiplier effect on capital to expand bank balance sheets is thin. SBICAP Securities has indicated that one-third to half of the fresh capital raised could be allocated to loan loss provisioning. Therefore, the necessity to raise fresh money or growth capital once the situation normalises (by FY22 going by expert estimates) looks high.


Under these circumstances, investors taking fresh exposure to banking stocks on the back of FY21’s capital raise may be caught on the wrong foot for two reasons — highly unpredictable financials and inevitable equity dilution.

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