Indian Private Banks Raise Capital Buffers To Near 15-Year Highs

India’s top private banks have collected large capital buffers to prepare for any surge in bad loans that may follow the Covid-19 crisis.

Over the last few months, most major private banks have raised capital following stress tests conducted internally and those mandated by the Reserve Bank of India. As a result, the tier-1 capital ratio and the common equity tier-1 ratio have risen to multi-year highs, suggesting these lenders are better prepared to deal with upcoming stress.

Tier-1 capital is a bank’s core capital. CET-1 is a subset of that and represents a lender’s core equity capital. The latter came into common use after 2014.

• ICICI Bank Ltd., which recently raised Rs 15,000 crore through a qualified institutional placement, will likely see its CET-1 ratio rise to an estimated 15.3%, according to Moody’s Investors Service. The CET-1 ratio will be the highest since March 2014, while the bank’s tier-1 ratio at 16.31% will be the highest since 2004.
• Axis Bank Ltd., which raised Rs 10,000 crore through its QIP issue, will see its CET-1 ratio rise to 15%, while its tier-1 ratio will rise to 16.12%. This is the highest tier-1 ratio in the bank’s history.
• For HDFC Bank Ltd., the tier-1 capital adequacy ratio as on June 30 stood at 17.5%, the highest since it started sharing this data in 1997, according to Bloomberg. The CET-1 capital of the bank stood at 16.7% as on June 30.
• RBL Bank Ltd. has approved the issuance of preferential shares worth Rs 1,566 crore to a clutch of investors led by Baring PE. This would help the bank push up its tier-1 ratio to 18.6%, while its CET-1 ratio would rise to 17.4%.
• Yes Bank Ltd.’s follow-on public offer in July to raise Rs 15,000 crore will push up its CET-1 and tier-1 capital ratios to 13.4% and 13.5%, respectively.
• IndusInd Bank Ltd. has also announced plans to raise Rs 3,288 crore through preferential allotment, which is likely to push up its CET-1 ratio to 14.36% and its tier-1 ratio to 15.69%.
• Kotak Mahindra Bank Ltd. was the first to complete a QIP in May. Its tier-1 ratio of 21.1% is the highest across this set of banks.

Buffer For Bad Loans Or Room For Growth?

While results of the stress tests conducted by lenders are not in public domain, the fund raises likely cover any gap that may have exited in capital requirements.

Bankers, however, say they also have room for growth with the capital they have raised.

According to ICICI Bank CFO Rakesh Jha, the capital raise is not just aimed at protecting the bank from stress, but also to aid growth. “We see growth opportunities to be there from a medium-term perspective for the banking system, in particular for the private banks. We would want to be competitively placed to capitalise on that opportunity,” Jha told analysts after announce the June quarter results.

Axis Bank chief executive Amitabh Chaudhry too said that it will look for growth opportunities as they emerge, knowing that they are now comfortable on capital.

“As of now, as we have stated again and again in all our quarterly calls and interaction with the media and analysts, our models show that the capital even before this capital raise was enough for any severe scenario because of Covid. This additional capital just adds more confidence and gives us more cushion to manage to any crisis,” Chaudhry had told BloombergQuint in an interview.

India’s largest private bank is yet to begin an equity fund raise to boost its capital base. “We are not a part of the herd. We have excellent capital adequacy and a great portfolio, and we have sufficient cushion to raise. And we've got subsidiaries if we want to raise. At this point of time, we don't feel the need,” HDFC Bank’s MD and CEO Aditya Puri had told analysts over a conference call after announcing the bank’s June quarter results.

PSU Banks Lag Behind

According to an assessment of the Indian banking sector by Moody’s, while private banks are building a strong capital base, public sector lenders are likely to need large scale support from the government.

“Although one-time loan restructuring allowed by the Reserve Bank of India will prevent a sudden increase in NPLs, NPLs and credit costs will increase in the next two years, hurting PSBs' already weak profitability and depleting their capitalisation,” the ratings agency said in its assessment, adding that the government would need to infuse Rs 1.9-2.1 lakh crore worth capital in public sector banks.

As on June 30, India’s largest lender State Bank of India reported a tier-1 ratio of 11.35% and a CET-1 ratio of 10.14%. Bank of Baroda reported a tier-1 ratio of 11.2% at the end of the first quarter, while its CET-1 ratio stood at 9.8%. Similarly, Punjab Nation Bank reported tier-1 and CET-1 ratios at 9.97% and 9.17% respectively.