ANTI QUE STOCK BROKI NG LI MI TED 28 March 2014 | || || 1 FROM THE RESEARCH DESK

Alok Kapadia
+91 22 4031 3442
alok.kapadia@antiquelimited.com
Paresh V Jain
+91 22 4031 3415
paresh.jain@antiquelimited.com
SECTOR UPDATE
Banks
RBI defers Basel 3 implementation; Low core tier 1 banks
key beneficiaries - Yes and PSU banks
Event:
RBI yesterday released revised guidelines on implementation of Basel 3
giving Indian banks some flexibility on implementation of Basel 3. The key
amendments in implementation of Basel 3 are as follows:
Under the earlier RBI guidelines on implementation of Basel 3 Capital Regulations, the
Capital Conservation Buffer (CCB) was scheduled to be implemented from March 31,
2015 in phases and would be fully implemented as on March 31, 2018. Under the
revised guidelines issued yesterday, implementation of CCB will begin as on March 31,
2016 till March 31 2009 i.e. Indian banks have been given an extension of one year.
The RBI has also amended the loss absorption features for non capital equity instruments
(Additional Tier 1). Pre-specified trigger for triggering of loss absorption features:
(conversion into equity shares, write down mechanism) has been revised from 6.125%
common equity tier 1 (CET1) of risk weighed assets to 5.5% common equity tier 1 (CET1).
Impact
In our update last week on global implementation of Basel 3, we flagged off that globally
a lot of banks are facing shortfalls to meet the capital, liquidity and leverage requirements
under Basel 3. Given the precarious state of the fiscal deficit situation in India, RBI in all
likelihood is likely to give banks flexibility in implementation of Basel 3. Hence The
above amendments to implementation of Basel 3 yesterday only validate what we
highlighted last week.The delay in implementation of capital consumption buffer by one
year will give PSU banks some breathing space in terms of capital requirements.
Currently, banks in India have been struggling to raise additional tier 1 capital under
Basel 3 guidelines, given the high risk premium that investors are demanding due to new
loss absorption features. Hybrids under the earlier Basel 2 regime did not have any loss
absorption feature and hence could pay coupon/dividend despite suffering P&L loss
post approval from the RBI. Under the new Basel 3 regime, hybrids have loss absorption
features like conversion to equity, write downs which get triggered below a certain core
Tier 1 ratio. Hence there has been no market for these additional tier 1 instruments. Bank
of India has been trying to raise an overseas dollar Hybrid tier 1 instrument but is struggling
on pricing front. Similarly IDBI bank has been trying to convert hybrid tier 1 instrument
issued in Dec 2012 under Basel 2 into a hybrid tier 1 instrument under Basel 3 but has
failed to do so and is facing investor wrath . In fact, only a few banks in Asia have been
successful in raising money through hybrid tier 1 instrument under the new Basel 3 regime.
Hence the flexibility on the loss absorption feature on Additional tier 1 instruments will
make the hybrid instruments more attractive for pension funds, insurance companies and
LIC.
http://businesstoday.intoday.in/story/idbi-bank-seeks-conversion-of-bonds-outrages-investors/
1/203065.html
http://www.livemint.com/Multimedia/55H6MS7736qUDhYP0ZbGrN/Bank-of-India-in-talks-
to-issue-countrys-first-Basel-III-bo.html
Our View:
Clearly, both these measures announced by RBI will reduce some of the heightened concerns
on capital for PSU banks and will lead to significant rerating in them, given investor fears of
loss of market share. Big beneficiaries would be banks with low tier 1 and low core equity
capital. Yes Bank amongst private sector banks is likely to be a significant beneficiary. We
are in the process of reviewing our recommendation of our coverage universe.
ANTI QUE STOCK BROKI NG LI MI TED 28 March 2014 | || || 2 FROM THE RESEARCH DESK
Transitional Arrangements for Scheduled Commercial Banks as per old guidelines (% of RWAs)
Minimum capital ratios 1-Jan-13 31-Mar-14 31-Mar-15 31-Mar-16 31-Mar-17 31-Mar-18
Minimum Common Equity Tier 1 (CET1) 4.5 5 5.5 5.5 5.5 5.5
Capital conservation buffer (CCB) - - 0.625 1.25 1.875 2.5
Minimum CET1+ CCB 4.5 5 6.125 6.75 7.375 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 9.625 10.25 10.875 11.5
Phase-in of all deductions from CET1(in%)# 20 40 60 80 100 100
Source: RBI
Note: *The difference between the minimum total capital requirement of 9% and the Tier 1 requirement can be met with Tier 2 and higher forms of capital;
# The same transition approach will apply to deductions from Additional Tier 1 and Tier 2 capital
Transitional Arrangements for Scheduled Commercial Banks as per new guidelines (As % of RWAs)
Minimum capital ratios 1-Apr-13 31-Mar-14 31-Mar-15 31-Mar-16 31-Mar-17 31-Mar-18 31-Mar-19
Minimum Common Equity Tier 1 (CET1) 4.5 5 5.5 5.5 5.5 5.5 5.5
Capital conservation buffer (CCB) - - - 0.625 1.25 1.875 2.5
Minimum CET1+ CCB 4.5 5 5.5 6.125 6.75 7.375 8
Minimum Tier 1 capital 6 6.5 7 7 7 7 7
Minimum Total Capital* 9 9 9 9 9 9 9
Minimum Total Capital +CCB 9 9 9 9.625 10.25 10.875 11.5
Phase-in of all deductions from CET1(in %)# 20 40 60 80 100 100 100
Source: RBI
Note: * The difference between the minimum total capital requirement of 9% and the Tier 1 requirement can be met with Tier 2 and higher forms of capital
# The same transition approach will apply to deductions from Additional Tier 1 and Tier 2 capital.
Capital positions of banks
Tier -1 (%) common Equity capital (%)
Axis Bank 11.5 11.5
HDFC Bank 9.9 9.9
ICICI Bank (standalone) 11.5 11.5
IndusInd 13.3 13.5
Yes Bank 8.5 7.9
BoB 8.7 8.87
BoI 7.9 7.28
Canara 7.5 7.1
Kotak Mahindra Bank (Standalone) 17.4 16.2
PNB 8.5 8.2
SBIN (standalone) 8.7 8.6
UNBK 6.8 6.3
Source: Basel Committee on Banking Supervision
Valuation Summary
Price No of Mkt cap P/BV(x) Adj P/BV (x) P/E (x) RoE RoA
shares (INR bn) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E
HDFC Bank 747 2,379 1777 4.1 3.4 4.2 3.5 21.0 16.5 19.7 20.9 1.9 2.1
HDFC 875 1,546 1353 4.8 4.2 4.9 4.4 25.5 21.7 19.9 20.8 2.6 2.6
ICICI Bank 1,260 1,154 1453 2.0 1.8 2.0 1.9 15.4 13.7 13.4 13.6 1.6 1.6
State Bank of India 1,840 684 1258 1.2 1.1 1.5 1.4 12.3 8.7 9.9 12.7 0.6 0.7
Axis Bank 1,430 468 669 1.8 1.5 1.8 1.6 11.5 10.2 16.4 16.1 1.6 1.5
Bank of Baroda 695 423 293 0.9 0.8 1.0 0.9 6.5 5.7 13.3 13.6 0.8 0.7
Bank of India 212 643 136 0.5 0.5 0.7 0.6 4.8 4.0 11.2 12.2 0.6 0.6
Punjab National Bank 705 353 249 0.7 0.7 1.0 0.9 7.3 5.8 10.0 11.6 0.7 0.7
Canara Bank 251 443 111 0.4 0.4 0.6 0.5 4.6 3.3 9.4 11.8 0.6 0.7
Kotak Bank 772 747 576 4.7 4.1 5.0 4.5 33.5 27.9 15.1 15.8 1.7 1.6
Union Bank of India 122 597 73 0.4 0.4 0.5 0.5 4.1 3.3 10.9 12.2 0.5 0.6
Yes Bank 394 359 141 2.0 1.3 2.0 1.3 9.5 6.4 23.1 21.6 1.4 1.3
LIC Housing finance 232 505 117 1.6 1.3 1.6 1.4 8.9 7.1 18.7 20.2 1.5 1.6
IndusInd Bank 492 523 257 3.0 2.5 3.0 2.6 19.8 15.7 15.9 17.4 1.6 1.7
Source: Antique
ANTI QUE STOCK BROKI NG LI MI TED 28 March 2014 | || || 3 FROM THE RESEARCH DESK
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