Public sector banks will gain from stake dilution, says Fitch

Public sector banks will be able to exercise greater flexibility in raising capital in the equity market with the government's plans to reduce stake in them to 52 per cent by 2019, ratings agency Fitch has said.

However, the agency said it expects access to core equity to remain challenging as the government's decision has not indicated a broader privatisation initiative in the sector. Fitch said the stakes are unlikely to go below 51 per cent in the medium term.

"As such, state-owned banks will likely have to continue relying on additional tier 1 (AT1) hybrid instruments to strengthen capitalisation in the short term, despite the government's planned sell-downs," the ratings agency said in its report on Friday.

Further, the report estimates that Indian banks will require $200 billion capital under Basel-III norms till 2019, of which the state-owned banks will account for around 85 per cent.

The progress to strengthen capital has been slow due to a low internal rate of capital accretion and limited access to core equity.

Fitch said that asset quality and earnings continue to remain stressed for most state banks notwithstanding some signs of early recovery.

"Expectations of higher restructuring and muted credit growth could further mean that earnings recovery will be slow and protracted," the report said, adding that as such, the plan to reduce government stakes may have to wait until there is a meaningful recovery in earnings.

State banks in India account for nearly 75 per cent of total banking system assets but hold 90 per cent of the system's stressed loans.

Fitch added that a cyclical recovery in FY16 should help ease the level of stressed assets, which is expected to peak by March 2015.