>BASEL III: Global regulatory standard on bank capital adequacy, stress testing and market liquidity risk

Highlights of Basel III:

• Core equity tier-1 of 5.5% as against 4.5% for international banks
• Capital conservation buffer of 2.5% by way of common equity
• Leverage ratio introduced at a minimum 5% (without risk weighting) as against 3% for international banks
• Early transition by March 2017, as compared to January 2019 as per international norms
• Core equity fulcrum of CAR
• Charges to core equity tier -1 as against total CAR
• Dividend payout ratios relaxed, allowed upto 100%

For most private sector banks Basel III transition is likely to be smooth. High core-equity tier-1 capital along with room for increase in capital conservation ratios augur well for private sector banks. Select public sector banks are likely to face hiccups. Lesser room for capital conservation as PSU already operate on low dividend payout and low core equity are amongst the concerns for these PSU banks. For every 1% increase in core equity, RoEs are likely to moderate by about 200 bps on an average for the Indian banking industry.


■ Indian Private Sector banks well placed
Indian Private Sector banks are comfortably positioned to move towards Basel III guidelines. Banks would need to keep 11.5% as overall CAR with tier-1 capital at 9.5% (including capital conservation buffer of 2.5%). Core equity tier- 1 capital is the fulcrum of Basel III, and its impact extends into dividend payouts and computation of additional tier-1 capital and tier-2 capital. Leverage ratio has been introduced with core-equity as the capital base. Higher core-equity and CAR requirements are likely to moderate banks’ RoEs from current levels.


■ Select public sector banks, however, are on a sticky wicket
This list includes Bank of India, Central Bank of India, IDBI Bank, UCO Bank, United Bank of India and Vijaya Bank. Conversion of perpetual non-cumulative preference shares, however, may see UCO Bank, United Bank of India and Vijaya Bank sail through. With the Government of India holds bulk of the preference shares of these banks, such a conversion could be on the cards. Others in the list are likely to relook at their growth strategy, resort to dividend cuts or tap equity funding sources.


■ Higher core equity likely to moderate ROEs
Higher core equity are likely to curtail ROEs. Banks on average deliver about 15% ROE, and our estimates indicate that for every additional 100 bps of increase in core equity, ROEs are likely to dip ~200bps. An increase of 1% in tier-1 ratio would need an additional capital of ~Rs 470 bn (~US$10 bn) with the total RWA in the banking system at ~Rs 47 trillion. We believe private banks are well placed to strengthen their core equity through internal accruals.


To read the full report: BASEL III
RISH TRADER