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					                                                                                                         Basel-3 Guidelines | Banking
                                                                                                                             May 3, 2012



 RBI releases Basel–3 Guidelines

 What the guidelines entail: Reserve Bank of India (RBI) released the final
 guidelines regarding the Basel-3 norms yesterday. Amongst other details, the key
 point is that the banks will have to achieve a minimum Core Equity Tier-I capital
 adequacy (CET1) of 5% by FY2014, which in a staggered manner will then have
 to be increased to 8% by FY2018.

 RBI Guidelines for transitional arrangements for Basel-3 norms
 Minimum capital ratios                          FY13    FY14     FY15   FY16   FY17   FY18
 Minimum Common Equity Tier 1                     4.5       5      5.5    5.5    5.5    5.5
 Capital conservation buffer (CCB)                   -       -     0.6    1.3    1.9    2.5
 Minimum CET1+ CCB                                4.5       5      6.2    6.8    7.4     8
 Minimum Tier 1 capital                             6     6.5       7      7      7      7
 Minimum Total Capital                              9       9       9      9      9      9
 Minimum Total Capital +CCB                         9       9      9.6   10.2   10.9   11.5


 Phase-in of all deductions from CET1 (in %)       20      40      60     80    100    100
 Source: Company, Angel Research


 Immediate impact: For 27 banks under our coverage (comprising 85% of the
 sector), as on FY2012 none of them are estimated to be below the immediate
 threshold of 5% of CET1 to be achieved by FY2014. However, in our view by
 FY2014, almost all banks will look to maintain a minimum CET1 of at least 8% to
 be comfortably above the minimum requirements.

 Based on this, a handful of banks including primarily a few small PSU banks like
 Central Bank, Vijaya Bank and UCO Bank would be the only ones that would be
 below the 8% threshold. This is because, for most other banks post the
 government infusion already announced, they are likely to be above 8% CET1
 from FY2013 itself. Few others such as Corporation Bank, IOB, IDBI and United
 Bank would also be marginally below 8%. SBI is likely to be the only large-cap
                                                                                              Vaibhav Agrawal
 that may end up below 8% (unless their risk-weighted asset growth lags total asset
                                                                                              022 – 3935 7800 Ext: 6808
 growth). In case of the smaller banks, since they are trading well below 1x P/ABV,
                                                                                              vaibhav.agrawal@angelbroking.com
 capital raising would result in dilution in EPS of 4% to 18% and in book value to
 the extent of 2% to 5% of our current estimates. In case of SBI, dilution would be           Varun Varma
 book-accretive but EPS-dilutive.                                                             022 – 3935 7800 Ext: 6847
                                                                                              varun.varma@angelbroking.com


                                                                                              Sourabh Taparia
                                                                                              022 – 3935 7800 Ext: 6872
                                                                                              sourabh.taparia@angelbroking.com




Please refer to important disclosures at the end of this report                                                                      1
                                                                                                   Basel-3 Guidelines | Banking



Exhibit 1: Shortfall (below 8% core tier-I capital) for banks under our coverage as of FY2014E
                Core Tier-1        Capital   Retained Earnings      CET1   CET1 %   Shortfall   Shortfall    Dilution      EPS    ABVPS
Bank
                 cap FY11         Infusion         FY2013-14        FY14     FY14    for 8%       (Rs cr)   required    impact   impact
FEDBK                5,084               -              2,045      7,129     13.3          -            -           -     0.0%     0.0%
J&KBK                 3,444              -              2,000      5,444     12.2           -           -           -    0.0%     0.0%
SIB                   1,650              -                993      2,644     11.1           -           -           -    0.0%     0.0%
DENABK                3,356          151                2,084      5,591     10.5           -           -           -    0.0%     0.0%
HDFCBK              24,055               -            15,557      39,612     10.4           -           -           -    0.0%     0.0%
INDBK                 7,842              -              4,593     12,436     10.4           -           -           -    0.0%     0.0%
ICICIBK             47,547               -            13,409      60,956      9.9           -           -           -    0.0%     0.0%
CANBK               17,549               -              8,959     26,508      9.8           -           -           -    0.0%     0.0%
ALLBK                 7,597        1,462                4,924     13,984      9.7           -           -           -    0.0%     0.0%
OBC                 10,170               -              3,593     13,763      9.3           -           -           -    0.0%     0.0%
BOB                 19,063         1,613              12,749      33,425      9.3           -           -           -    0.0%     0.0%
SYNBK                 6,640          866                3,571     11,078      9.0           -           -           -    0.0%     0.0%
ANDHBK                6,436              -              3,159      9,595      8.9           -           -           -    0.0%     0.0%
AXSB                18,084               -            11,875      29,960      8.6           -           -           -    0.0%     0.0%
PNB                 18,958         2,875              12,811      34,645      8.4           -           -           -    0.0%     0.0%
BOM                   2,509          995                1,566      5,069      8.4           -           -           -    0.0%     0.0%
BOI                 15,282         2,083                8,210     25,574      8.2           -           -           -    0.0%     0.0%
YESBK                 3,683              -              3,044      6,727      8.0           -           -           -    0.0%     0.0%
UNBK                11,027         1,005                5,189     17,221      8.0           -           -           -    0.0%     0.0%
CRPBK                 7,086              -              3,681     10,768      7.8        0.2        285          0.7     -3.4%   -1.7%
UTDBK                 3,546          305                1,616      5,467      7.8        0.2        159          2.3     -4.7%   -2.7%
IDBI                12,058         5,293                5,776     23,127      7.8        0.2        717          7.1     -3.7%   -1.8%
IOB                   7,775        1,978                2,960     12,713      7.6        0.4        754          8.4     -6.7%   -3.8%
UCOBK                 4,809          759                2,751      8,319      7.2        0.8        880        11.2     -10.5%   -2.6%
SBI                 78,812         7,900              33,375     120,087      7.0        1.0    16,492           7.7     -4.8%    5.7%
VIJAYA                3,258          147                1,185      4,589      6.9        1.1        694        11.9     -12.3%   -4.7%
CENTBK                7,631        1,000                2,282     10,913      6.4        1.6      2,671        27.2     -17.9%   -2.5%
Source: Company, Angel Research


                                                 Medium-term impact: The immediate impact is restricted to few smaller banks (of
                                                 which, in case of the three most exposed banks vis. Central Bank, Vijaya Bank and
                                                 UCO bank we have a Neutral / Reduce rating). However, in the medium-term in
                                                 our view the Basel 3 guidelines imply significant capital shortage for the Indian
                                                 Banking system. By the end of FY2018, as the minimum CET1 requirement itself
                                                 moves to 8%, we believe most of the banks would look to maintain closer to 9-10%
                                                 CET1 capital adequacy.

                                                 At the same time, if we factor in 17% asset growth for the sector between FY2014-
                                                 18E and assume that average ROEs for the sector improve by 100-200bps, then
                                                 based on retained earnings alone, CET1 is estimated to decline to 7.9% from the
                                                 current 9.1% estimated for FY2012. Even if on average, the sector is to maintain
                                                 9% CET1 this implies a capital shortage of about `1.4lakh cr and at 10% CET1, a
                                                 shortage of Rs2.6lakh cr. This amounts to 14% and 27% of the sector’s networth,
                                                 respectively, or an additional equity requirement of 2.5%-4.5% every year for the
                                                 next 6 years.




May 3, 2012                                                                                                                          2
                                                                      Basel-3 Guidelines | Banking




              Exhibit 2: Movement of Core Tier-I ratio* over FY2012-FY2018E
              Year (` cr)                         Core Tier 1           RWA                Core Tier 1 ratio
              FY2012                                 431,276          4,708,821                             9.2
              FY2013                                 489,196          5,555,887                             8.8
              FY2014                                 557,604          6,554,308                             8.5
              FY2015                                 638,456          7,668,540                             8.3
              FY2016                                 734,224          8,972,192                             8.2
              FY2017                                 844,358         10,497,465                             8.0
              FY2018                                 971,012         12,282,034                             7.9
              Source: Company; Note:*For our coverage universe which account for ~85% of overall industry



              Exhibit 3: Sector wide shortfall as of FY2018E
                                                  Core Tier-I    Shortfall    Shortfall      % of Core FY18
              Shortfall
                                                 ratio - FY18       (ppt)        (` cr)         tier-I capital
              Sector wide shortfall at 9%                 7.9         1.1    139,594                   14.4%
              Sector wide shortfall at 10%                7.9         2.1    262,944                   27.1%
              Source: Company, Angel Research


              New Bank licenses: In our view, the issue of more new bank licenses than the
              earlier anticipated 3-4, including to some large corporates, with each of them
              looking to invest about `5,000-10,000cr of equity capital, was one of the key risks
              on the horizon for the banking sector. However, in light of Basel 3 requirements,
              even if the RBI does give more new bank licenses, in our view in light of the capital
              shortage in the banking sector post Basel 3 requirements, over a 6 year period,
              this would still not amount to a supply glut. On the contrary, even after the
              `30,000cr-40,000cr of fresh capital, there would still be significant capital
              shortage which would have to be met by the incumbents.

              Positive implications of capital shortage: For the sector as a whole, in our view,
              even after factoring in new bank licenses, we expect intensity of balance sheet
              competition to be low especially from the PSU banks. As a result, we continue to
              have a positive outlook on overall margins and ROEs from a one-year +
              perspective (notwithstanding any short-term re-pricing and asset quality related
              volatility in margins).

              The benefit of this will be especially enjoyed by those banks which already have
              high capital adequacy (main beneficiaries include ICICI Bank and HDFC Bank) or
              which can raise equity at high book-accretive premiums (such as Axis Bank and
              Yes Bank). In our view, these banks will stand to benefit from high
              margins/ROAs/ROEs as well as market share gains from a medium-term
              perspective. Of these, taking into account valuations as well, we reiterate Axis
              Bank, ICICI Bank and Yes Bank as our top picks.




May 3, 2012                                                                                                  3
                                                                                                                Basel-3 Guidelines | Banking



Exhibit 4: Recommendation Summary
                                        Tgt. Price                   FY2014E      FY2014E Tgt. FY2014E          FY12-14E EPS FY2014E FY2014E
Company     Reco.               CMP (`)                Upside (%)
                                                (`)                  P/ABV (x)       P/ABV (x)   P/E (x)           CAGR (%)   RoA (%) RoE (%)
AxisBk       Buy                  1,058    1,587             49.9         1.4             2.2       7.6                 16.4     1.5    20.3
FedBk        Neutral                415            -             -         1.0                 -        7.2               13.0        1.3   14.5
HDFCBk       Neutral                553            -             -         3.2                 -       15.6               27.0        1.7   22.1
ICICIBk*     Buy                    858      1,201           40.1          1.4               1.9       10.6               20.4        1.5   16.0
SIB          Accumulate              24          25           5.4          1.0               1.1        6.0                6.7        0.9   17.7
YesBk        Buy                    338        470           39.0          1.7               2.4        8.1               22.5        1.4   23.3
AllBk        Accumulate             171        193           12.4          0.7               0.8        4.2               (2.1)       1.0   17.0
AndhBk       Neutral                116            -             -         0.7                 -        4.3                6.5        1.0   16.7
BOB          Buy                    731        943           29.0          0.9               1.1        4.8               12.2        1.1   19.2
BOI          Accumulate             353        386            9.4          0.9               1.0        5.3               16.4        0.8   16.9
BOM          Buy                     53          62          17.0          0.6               0.8        3.9               26.8        0.9   17.5
CanBk        Buy                    429        532           23.9          0.7               0.9        4.5               10.9        0.9   16.7
CentBk       Neutral                 95            -             -         0.8                 -        4.8               45.7        0.5   13.8
CorpBk       Buy                    400        508           26.9          0.6               0.7        3.6                2.5        0.8   16.2
DenaBk       Buy                     92        118           28.2          0.6               0.7        3.6                6.2        0.9   16.9
IDBI#        Buy                     98        117           18.9          0.6               0.7        4.1               22.7        0.9   14.8
IndBk        Accumulate             217        240           11.0          0.7               0.8        4.4                5.4        1.2   18.2
IOB          Buy                     86        104           21.5          0.5               0.7        4.1               29.9        0.6   13.9
J&KBk        Neutral                907            -             -         0.8                 -        4.6                8.8        1.4   18.6
OBC          Buy                    232        285           23.0          0.5               0.6        3.6               27.7        0.8   14.3
PNB          Buy                    844      1,138           34.8          0.8               1.1        4.7                8.8        1.1   18.5
SBI*         Buy                  2,139      2,593           21.2          1.3               1.6        7.7               23.6        1.0   19.1
SynBk        Buy                    103        128           23.7          0.6               0.8        3.8                8.7        0.8   17.2
UcoBk        Neutral                 76            -             -         0.8                 -        4.0                7.7        0.7   16.2
UnionBk      Buy                    222        266           19.9          0.7               0.9        4.5               27.2        0.8   17.4
UtdBk        Buy                     66          87          33.2          0.5               0.7        3.0               11.4        0.7   16.0
VijBk        Neutral                 57            -             -         0.7                 -        4.9               11.0        0.5   13.7
Source: Company, Angel Research; Note:*Target multiples=SOTP Target Price/ABV (including subsidiaries), #Without adjusting for SASF




May 3, 2012                                                                                                                                   4
                                                                                                         Basel-3 Guidelines | Banking




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May 3, 2012                                                                                                                                 5