Banks Revisiting pension liabilities—impact manageable:: Kotak Sec

Visit http://indiaer.blogspot.com/ for complete details �� ��


Banks/Financial Institutions
India
Revisiting pension liabilities—impact manageable. We believe that the impact of
pension costs is likely to be about 10% of networth for banks—likely to be provided
through P&L over next 5 years. We still remain unconvinced by the retirement benefit
estimates of Indian banks given the discrepancies vis-à-vis their earlier estimates or
accounting practices. We are factoring this liability in our current estimates (banks are
already making provisions) and believe that the high RoA/RoEs are sufficient to absorb
the extra cost. We maintain our positive view on PSU banks, with our top picks being
BOB, PNB and Union Bank.

Pension liability likely to be about 10% of book, likely to be provided over 5 years
We are building various scenarios to understand the impact of the pension liability and we believe
that the underlying liability for pension is likely to be about 10% of FY2012E book, but likely to be
provided through P&L over five years. We believe that a fair estimate of liability to be created for
every employee is likely to remain in the range of about `1.4 mn, ahead of our initial estimates of
`1.1 mn. We believe that banks like SBI, PNB, Bank of Baroda, Canara, Indian and OBC will have
relatively lower pension liabilities.

Liability shows sharp deviation across banks
We make simplistic and standardized assumptions to estimate the liability which could be different
from the final liability. Few banks have announced preliminary estimates, but we see discrepancies
in these estimates from their own internal policies. In most of analysis we find that the shortfall
deviates from the existing liability/employee or does not fully capture the transfer of employer’s
provident fund contribution and employee’s contribution. Hence, we would wait till we get better
clarity from banks who have announced like Union Bank, PNB, OBC, Andhra and United Bank.

Banks providing for pension/gratuity in FY2011E, only pension provisions required from FY2012E
We are building conservative estimates on our staff costs for FY2011-12E and believe that banks
have been making higher provisions in 1HFY11 after adjusting for the revised employee costs
(dearness allowance to factor higher inflation, new promotions and wage arrears). Further, banks
are also making the revised gratuity provisions in FY2011E, which are unlikely to be repeated,
which gives banks a natural cushion to absorb higher pension expenses from FY2012E. We are
building salary expenses to increase by 17% in FY2011E and 13% in FY2012-13E, estimates which
may not require significant revision pending final estimation of the liability.

Maintain positive outlook given the structurally higher RoEs
We maintain our positive outlook on public sector banks despite the near-term headwinds. On a
structural basis, we are comfortable that public sector banks will deliver higher RoEs of about 20%
levels, with select banks well over 20% levels. Further, we believe that the recent announcement
of capital infusion largely in the form of preference shares to result in structurally higher RoEs.
However, we see near-term overhang given the uncertainty that will prevail till the final liability is
announced along with any amortizing benefit.