Opaque disclosures hurt govt banks' valuations
PSU banks have failed to cash in boom time despite desperate capital need
January 30, 2015 Last Updated at 00:50 IST
The fact that the markets are touching new highs has failed to bring cheer to public sector banks (PSBs). Most of these have seen their capital adequacy ratios being depleting through the past few years, with non-performing andrestructured assets ballooning, for which they have had to allocate capital by way of provisioning.
Though market conditions are conducive, most PSBs aren’t keen to tap the capital markets, primarily due to low valuations.
On Tuesday, the State Bank of India (SBI) board approved equity capital-raising of Rs 15,000 crore, though the bank hasn’t disclosed the timing of the fund-raising yet. The approval is valid for a year. (HEALTH CHECK)
The Bank Nifty, the benchmark banking index, has doubled in the past year, outperforming the overall indices. Some private banks have seen their valuations double. However, barring a few, most PSBs have failed to reap the benefits of the bull run.
Both chief executives of these banks, as well as the government, have cited low valuations as deterrence to tapping the capital markets. The Reserve Bank of India (RBI), too, said capital-raising by public sector banks other than through capital infusion by the government faced challenges because of the relatively low valuations of these entities, compared to their private peers.
Why are investors not buying the PSB story? The dismal financial health of these entities isn’t the only reason. Analysts say the opaque nature of discloses might well explain the lack of investor appetite.
“Public sector banks are in a vicious cycle — they need to raise capital, but they are trading at less than book values, which implies capital-raising will be book value-dilutive in nature,” says Saday Sinha, an analyst with Kotak Securities.
Market participants say banks are unable to provide consistent estimates of certain crucial parameters that reflect headwinds to earnings, such as slippages from restructured assets and restructuring asset pipeline.
For investors, slippages on the restructured assets front are a concern. These have risen sharply in the past two quarters and are out of sync with the projections of bank managements. Restructured asset pipelines, too, have often been at variance with estimates.
According to RBI data, stressed advances in the banking system increased to 10.7 per cent of total advances in September 2014 from 10 per cent in March 2014. “At 12.9 per cent of total advances in September last year, PSBs continued to record the highest level of stressed advances; private banks recorded 4.4 per cent,” RBI said in its latest Financial Stability Report.
And, worries related to non-performing assets (NPAs) are far from over. “As far as NPAs are concerned, these banks are still not out of the woods. There could be some front-loading of restructuring assets during the fourth quarter, as the regulatory forbearance they enjoy won’t be there from April 1, 2015,” Sinha said.
RBI has mandated banks have to make provisioning for restructured assets in line with sub-standard assets — 15 per cent compared with the current five per cent.
According to RBI, Indian banks are expected to remain under pressure on account of additional requirements towards capital conservation buffers, countercyclical capital buffers and supervisory capital.
In addition, delay in appointments to senior management posts has hampered decision-making at PSBs. While the government appointed the chief executives of four banks last month, the top positions at four others, including Punjab National Bank, Canara Bank and Bank of Baroda, remain vacant.
“When a bank is going to investors for raising equity, the absence of a chief executive sends a wrong signal,” said a senior official at a PSB.
http://www.business-standard.com/article/opinion/opaque-disclosures-hurt-govt-banks-valuations-115012900150_1.html
