MUMBAI(Reuters): The Indian government will inject 79 billion rupees ($1.6 billion) into State Bank of India , the country’s top lender, through a share purchase as it shores up the capital base of state banks eroded by fast growth and worsening asset quality.
Ratings agency Moody’s downgraded SBI’s standalone rating in October, citing inadequate capital and declining asset quality, putting pressure on the government – it’s the largest shareholder - to inject money into the bank.
The government’s stake in SBI will rise to about 66 percent from 59 percent with the injection of new capital, said a banking analyst at Mumbai-based brokerage who did not want to be identified as he was not authorised to speak to the media.
New Delhi wants to maintain its majority shareholding in state banks, which account for 70 percent of all loans, and a Tier-I capital adequacy ratio of least 8 percent or more for larger banks such as SBI.
The government’s efforts to bolster capital at its banks has been slowed by its struggle to contain a yawning fiscal deficit.
SBI had said it needed at least 80 billion rupees before March to maintain tier-I capital adequacy ratio of 8 percent.
“I wasn’t anticipating so much money, in fact,” said A.S.V. Krishnan, a banking analyst at brokerage Ambit Capital, which has a sell rating on SBI stock.
“This will be sentimentally positive but I doubt how much more can the shares move,” he said. “Unless I see gross non-performing loans coming down sequentially, I won’t be comfortable.”
Rising interest rates and slowing economic growth are eroding the asset quality of India’s banks, especially state lenders.
Net non-performing assets at SBI, which holds about a quarter of Indian bank loans and deposits, rose to 2.04 percent of assets at the end of September from 1.7 percent a year earlier.
Moody’s downgraded its outlook for India’s banking system to “negative” from “stable” in November, saying that slowing economic growth was hitting asset quality, capitalisation and profitability.
Fitch Ratings, which has a “stable” outlook for Indian banks, expects state-run banks’ profits to fall by 15 to 20 percent in 2012 due to higher loan loss provisions.
“The government is expected to play a key role in maintaining stability of the banking system through periodic injections of core equity,” it said this month.
Krishnan expects an improvement of about 100 basis points in SBI’s capital adequacy ratio after including profit for the year-ended March 2012. SBI had a Tier-1 capital adequacy ratio of 7.6 percent as of the end of September.
“Fundraising was a major overhang for SBI shares. So now if the money comes, it will really be a positive for the bank,” said the first banking analyst.
SBI had earlier planned a $4.5 billion rights issue to boost its capital but it scrapped that plan last year due to poor market conditions.
The shares of SBI, which has a market capitalisation of $26.2 billion, rose by nearly a quarter this month as investors rushed to buy the battered stock.
The shares are down nearly 28 percent over the past 12 months, underperforming the National Stock Exchange’s banking index, which has dropped about 9 percent.
Of the 42 analysts tracking SBI, 26 have a ‘buy’ or a ‘strong buy’ rating on its shares. Eight rate the stock a ‘sell’ or a ‘strong sell’ while the same number rate it a ‘hold’, according to Thomson Reuters’ Starmine.
SBI shares have the cheapest valuations among large Indian lenders, trading at 1.4 times book value. This compares with 1.9 times for the No. 2 lender ICICI Bank and 4.4 times for HDFC Bank.
SBI is due to report December quarter results next month but has not announced a date. ($1 = 49.3100 Indian rupees)