Revaluation reserve – an avenue for core equity capital now
RBI allowed revaluation reserve (at 55% discount) to be a part of core equity capital v/s Tier II capital as of now. While some large banks like CBK, BOI, INBK and CBOI have already revalued assets and utilized the benefit as a Tier II capital, most otherbanks are yet to do so. For the PSBs which have recognized it, it constitutes 10-15% of networth and 50-80bp of Tier II capital. Banks which have already recognized are unlikely to see change in capital adequacy ratio as it will be a movement from Tier II capital to CET 1. Revaluation reserves (at PSB sectorial level expected at ~INR650b) and will provide INR290b+ (~19% of requirement) of regulatory capital for PSBs.
FCTR – Immediate recognition possible now
Banks with higher share of overseas operations are likely to be key beneficiaries of this regulation. Based on FY15 reported foreign currency translation reserves, we expect 10-40bp capital release for SBIN, ICICIBC, AXSB, BOB and BOI. While private banks have been gradually recognizing the benefit from the P&L (post tax), PSBs were yet to do so (recently, SBIN started recognizing it). Currency depreciation in FYTD would have increased this reserve in the balance sheets. Instead of gradua recognition this will help in one time recognition within CET 1 capital. Our calculations suggest that it will provide ~INR85b of regulatory capital to PSBs (total outstanding as of FY15 was ~INR100b and assumed to be ~INR110b as of 9MFY16).