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Banks Could Achieve Basel III Targets

Thursday, May 10, 2012
By Manik K. Malakar

 Will have to raise an amount of between 45 to 55 billion dollars in the next six years

There is some good news for India’s banking sector, which has been under severe pressure in the past few quarters. A series of adequacy norms that the RBI wanted them to implement has been deferred. That having been said experts feel that banks should be able to meet capital adequacy norms on time and even ahead of schedule.

“In the final guidelines for Basel III released on May 2, 2012, RBI provided a small relief to Indian banks by extending the time schedule for compliance with Basel III requirements from FY 17 (as proposed in the draft version) to FY18,” notes CARE Research in a review of Basel III norms.

According to an analysis by CARE Research, ‘in order to keep adequacy norms in check, India’s banks will have to raise an amount of between 45 to 55 billion dollars in the next six years. (i.e. FY18) to meet capital requirement under BASEL III guidelines. “Of the total amount to be raised, we believe PSU banks will be required to raise 15-20 billion dollars from the capital market, assuming GOI maintains current stake in PSU banks,” says the CARE analysts. Other norms would be a price to book value of 1.

Considering the generally weak economic scenario and the generally bad finances of the government, the mandarins are going to have some interesting conundrum in figuring finances out, as they will have to input 30 billion dollars. Remember the fiscal deficit is out of control and the government’s divestment norms for PSUs are falling behind.  On the other hand private banks are well capitalised vis-à-vis their PSU cousins and will require lower funding.

So from the point of view of the investor what are the takeaways. CARE notes that for every 1 % increase in core equity ratio, ROE (Return on Equity) will plummet by about 80 to 100 basis points (one basis point is one/hundredth of a percentage point). However, banks may increase fee income or bring in cost efficiency to protect ROE.

There will also be according to the CARE report no requirement to maintain countercyclical capital buffer. BIS (Bank for International Settlements) had required banks to maintain a buffer at 0 to 2.5% according to national circumstances. “The primary aim of this buffer is to protect banking sector from periods of excess credit growth,” analysts note.

This will have a positive impact on Indian banks since they will not have to maintain additional equity requirements for maintenance of the counter cycle capital buffer.

Another of the norms that banks must implement is that unamortized pension liabilities must be deducted from common equity. CARE opines that PSU banks would be required to write off some Rs. 13,500 crore before January 1, 2013 representing 4 to 13 % of net worth in FY12 period.

An interesting norm is that Basel III forbids banks from ‘Cherry-picking’ rating agencies for each type of claim unless there are substantial grounds for the same. Again analyst note that banks should use rating agencies and their ratings consistently.

At the end of the day analysts are positive on India’s banks meeting the new norms. “While equity requirement is set to arise in later years (i.e. 3% to total equity to be raised in FY15, 9% in FY16, 32% in FY17 and 56% in FY18), we believe banks might meet higher capital requirement ahead of time schedule, that is equity raising plan can be anticipated to be earlier than required,” the CARE analysts say.

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