India cuts capital allocation for PSUs to INR70-80bn

Half of PSU banks will be affected.

It has been noted that the government of India recently cut the capital allocation for PSUs to INR70-80bn from INR120bn and changed the allocation process to more efficient/profitable banks versus infusing money into capital-starved PSUs until FY14.

According to a research note from Nomura, though capital was always a challenge, its expectation along with the market was that efficient PSU banks will raise their own capital through public issues and the government will support weaker ones through budget allocation.

In Nomura's estimates, overall, PSU banks need INR1.85trn of equity capital (~40% of their FY14 net worth), but weaker ones require ~INR1.25trn of capital (~85% of their net worth), which is higher than their current Mcap.

It also noted that due to the changed capital allocation rules, 50% of PSU banks will be forced to
cut on growth drastically.

Here's more from Nomura:

Quantifying market share gains for private banks - The revised rules imply significant growth slowdown for PSUs to meet BASEL III guidelines, given their capital constraints. We split PSU banks into 4 quartiles, based on the growth they can achieve with ~40-50% dilution in the next 4-5 years.

While the 1st and 2nd quartile PSU banks can still manage ~12-14% growth, the 3rd and 4th quartile PSU banks will be able to manage only 6-8% growth, leaving significant room for growth for private banks.

Assuming system growth of ~15.5% over FY14-19F and the weak PSUs managing 8% growth (30% loan share) and better PSUs managing ~13% growth, it implies a +25% loan growth opportunity for private banks.

In the last decade, private banks had gained ~75bps annual market share and now we expect ~200bps annual market share gains for private banks.

Winners and implications for various banks/NBFCs - PSU banks: Smaller PSUs will need to cut growth drastically and this in the long term will force consolidation, but the near-term investment case for smaller PSUs has become challenged.

We remain selective, but maintain our sanguine view on PSUs with our preference for BOB (Buy)/Union (Buy)/SBI (Buy) over PNB (Neutral)/BOI (Buy).

Regional banks: These banks have lagged new private banks in growth and the slowdown at PSU banks is an opportunity for them to catch up. Geographically, though, the home markets of weak PSU banks are not the home markets of these regional private banks.

New private banks: They will likely gain most of the share weak PSUs will lose. Product-wise, term lending/Infra/SME lenders will benefit more given the low retail exposure of weak PSU banks and hence growth challenges for Axis (Buy)/ICICI (Buy) should be lesser in FY16/17F. We estimate a +25% growth opportunity for private banks.

While this is high vs. the growth achieved in the past two years, the growth of these banks will still be lower than the growth in FY04-07.

Lastly, NBFC/HFCs: IFCs could benefit with their higher share of infra lending as these banks turn risk-averse. Rural NBFCs are unlikely to benefit as customer segments are relatively different.