Banks’ exposure to stressed sectors, loan-loss cover and pre-provision earnings determine the urgency of their capital requirements, which is more pronounced for PSBs.
Public-sector banks (PSBs) stand to face solvency risk unless the government goes for a fresh round of capital infusion into them, Fitch Ratings said in a report on Monday. These banks’ proposed capital raising from private sources is not going to be enough to fully mitigate anticipated risks, the report added.
“The state has not announced anything so far but we expect some infusions eventually to support the banks’ capital-raising initiatives,” analysts at Fitch wrote, pointing to instances of many large PSBs moving to raise their own funds.
State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BOB) and Canara Bank plan to raise up to $6 billion in total, adding about 100-150 basis points (bps) to their common equity tier-I (CET-I) ratios even as execution risk remains high due to depressed equity valuations. All Indian banks, including private-sector ones, will face capital erosion in the high-stress scenario envisaged by the rating agency, but PSBs are the most vulnerable, the report said.
Banks’ exposure to stressed sectors, loan-loss cover and pre-provision earnings determine the urgency of their capital requirements, which is more pronounced for PSBs. “Canara Bank is the most challenged under our stress scenarios due to its inadequate loan-loss coverage while ICICI Bank is the least affected due to stronger capitalisation and better loss coverage relative to peers,” the report said.
Many PSBs are able to meet minimum regulatory thresholds under moderate stress, but most struggle to manage a 6.125% CET-I ratio under high stress, the applicable bail-in trigger for additional tier-I (AT-I) securities from September 2020.
Fresh equity injections have become significantly more imperative as economic recovery remains shaky due to continued acceleration in new coronavirus cases, Fitch said. Private banks have better loss-absorption capacity in the stress test.
Nonetheless, they are bolstering core capital with ICICI Bank and Axis Bank planning to raise nearly $2 billion each in fresh equity in the near term. These rounds of capital-raising should add 200-245 bps to their CET1 ratios, further widening the gap with state-owned peers, Fitch said.