With the Moody's downgrading of the SBI sending a shock across the markets, the question uppermost in the minds of investors is what would happen to SBI's plans to raise nearly Rs 20,000 crore through a rights issue.
Another important question is about the fate of the divestment plans of the Government since it was not only the SBI stock, but several PSUs that were on the FPO queue which saw their share prices being hit today after the news broke about Moody's downgrade.
Interestingly, the Divestment Secretary, in a TV interview today, hinted the divestment target may be revised due to tough market conditions but that was before Moody's bombshell.
For the SBI, the downgrade could not have come at a worse moment since the stock had already shed about 40 per cent of its value from its year's high price, with much of the decline happening after its last year's results were announced when it had to make huge provisioning that eroded its Q4 profits. With significant decline in share price, how the bank would get a reasonable value for its stock, if it opts to go ahead with the rights issue in the third or last quarter of current fiscal, is any body's guess.
Other PSUs
Already, ONGC had to put off its FPO reportedly because of differences over pricing of the issue. Many other PSUs like BHEL, SAIL etc are also on the disinvestment list and with retail investors being offered shares at a discount to market price, any fall in share price would only hurt overall mobilisation. During this year, so far, Government was able to raise only about Rs 1,100 crore through the PFC issue, as against the targeted garnering of about Rs 40,000 crore through divestment. Both BHEL and SAIL hit their 52 week lows today, though the stocks pulled back a little at close.
It is not only the rights issue of SBI but the rights issue of State Bank of Travancore which is hanging fire. It is nearly four months since the Draft Letter of Offer of SBT to raise up to Rs 500 crore was filed with SEBI, but little is known as to when the issue would hit the market. Since then, the share price of SBT also has suffered which might have an impact on the fund raising targets of the bank through the issue.
In an interview to Business Line , Mr Dinesh Thakkar, Chairman and Managing Director – Angel Broking, Mumbai, said in spite of being India's largest bank, SBI's capital adequacy being amongst the lowest in the Indian banking sector was a matter of concern and it looked “a bit unlikely to me that a rights issue of the magnitude of Rs 23,000 crore would go through easily in this fiscal itself.”
Lower capital adequacy
He felt the downgrade also reflected mainly the concerns on SBI's lower capital adequacy compared to other banks. But valuations of the stock have been really beaten down since the 4th quarter results and for a “long-term investor this looks like a good opportunity to get a bank of SBI's calibre at reasonably cheap valuations.” He felt that once the capital raising happened, the overhang on the stock will go.
On whether the down grade was an over- reaction or was it justified, he said this should be seen in the backdrop of global events and “possibly rating agencies are prefering to err on the side of caution.” The Indian banking system, including SBI for that matter, from a medium to long-term perspective have “much lower risk and much higher capital adequacy and stronger fundamentals then their global counterparts in developed countries and eventually I believe ratings agencies will also come around to this view.”
Mr Thakkar said there have been indications of a “shift in mindset towards profitability” by the bank which had been ahead of all other banks in raising interest rates recently, bringing it almost on par with others, compared to the earlier situation when to grow its balance sheet it was keeping its lending rates much lower than other banks. This has resulted in a very healthy improvement in its Net Interest Margins (NIMs) to be among the highest in the banking system. It is just that the bank has to make some more one-time provisions to meet with regulatory requirements and subsequent to that “from the 2nd half of this fiscal year in profitability terms it is likely to be among the healthiest in the sector.” He was confident that in the next fiscal year, SBI would get the equity capital it needs to maintain its market share in the Indian banking sector.
Rub-off impact
The Angel Broking CMD said that it was possible that some of the larger PSU banks that have meaningful international operations may see some rub-off impact, though in his view even Moody's has been very explicit in pointing out that this “downgrade is on account of very specific set of circumstances in SBI, wherein in a weaker macro-environment it is finding itself with temporarily low capital adequacy.”
On the fate of the PSU disinvestment programme and whether the Government will be able to raise the Rs 40,000 crore, Mr Thakkar said, “Looking at the current market environment, it is possible that with market conditions also being a little weak, there may be some postponement in the Government's divestment programme.”