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UBS Investment Research
First Read: India Banking & Finance Sector
RBI mandates standard asset provisioning
0.25% mandated on outstanding standard assets
In a bid to support counter cyclical measures, RBI has mandated Non Banking
financial companies (NBFCs) to create standard asset provisions of 0.25% on
outstanding standard assets. Banks have a requirement to create 0.4% on standard
asset (0.25% for priority sector).
Implication on FY11 pre tax earnings likely to be 5-6%
Given the requirement is retrospective in nature, one time catch up in provisions
will impact FY11 earnings by 5-6%. This is assuming nil outstanding provisions
currently; however IDFC, HDFC and LIC housing finance do create general
provisions/contingency provisions which could be used to offset this requirement.
Other NBFCs like REC/PFC and SHTF will likely need to make these
requirements. Over medium term (FY12/13) we see this hardly an issue as the
impact will be ~1% and also it’s a general provision (and not a specific one)
One more overhang; doesn’t help sentiments
New guideline in our view improves the quality of balance sheet although it
doesn’t help the sentiments which have been weak due to prevailing liquidity
conditions. Valuations which have corrected severely (20-30%) are attractive
despite near term pressure on earnings in our view. We would look at reviewing
our estimates post discussion with various managements.
Key recommendations
We like SHTF the most; we have BUY on REC & PFC on attractive valuations.
We are Neutral on IDFC and have a Sell on LICHF.
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