BSE Index Analysis, Securties , Standard Experts
Banking Sector -
Basel III: Banks Require Rs 1.5 tn by FY18
Indian banks will require additional capital of Rs 1.5 tn by FY18E (beyond normal growth requirements), of which Rs 600 bn will be required by FY15E. Private Banks are better placed compared to PSU peers due to lower reliance on hybrid instruments and relatively better Tier I ratio.
Our interaction with banks suggests they are comfortably placed for the near term. However, RBI is yet to announce final guidelines on counter-cyclical capital buffer, which will enable banks to plan their capital raisings in step with the Basel III timeline.
The guidelines on Basel III will be implemented in a phased manner by March 2018 with focus on increasing the core equity component in overall capital. Core Equity Tier I has been increased to 8% (including buffer) against current overall Tier I requirement of 6%.
Rationale:
The guidelines focus on various aspects of businesses that will help in reducing risk for the overall financial system (1) restricted dividend or bonus payouts when capital ratios fall below mandated levels, (2) lower leverage ratio which will force banks to shrink off-balance sheet businesses and investments in subsidiaries (material now for some private banks), and (3) cross-holdings of capital instruments among banks should be deducted from core capital.
Basel III excludes hybrid Tier-I instruments from common equity Tier I. Banks with low Tier I ratios and/or those who rely too heavily on hybrid instruments may see hit on RoE with reduced leveraging ability. As per our analysis (refer table on page 2), hybrid debt (IPDI/PNCPS) is used primarily by PSU Banks.
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