Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Relaxed provisioning norms
RBI has relaxed the NPL provisioning norm for banks from a flat 70% to
the older and more lenient slab-wise provisioning standard for new NPLs.
We are a bit surprised by this move as RBI has generally advocated for
counter-cyclical buffers. Moreover, Indian banks have a comparatively
lower NPL coverage ratio of sub 60% (~70% including write-offs) and
their healthy profitability and capital adequacy level could have supported
enhancement of coverage levels. We see 2-4% upside risk to earning
estimates for FY12 if provisions are 10% lower than estimates, but the
norms would be neutral to adjusted BVPS. Banks that are seeing higher
delinquencies like SBI, PNB and Union may see higher upsides risks.
RBI relaxes NPL provisioning norms
q Till recently, Indian banks were required to maintain specific loan loss reserve on
NPAs to the extent of 70%, including technical write-off of loans.
q RBI has relaxed this norm and has permitted banks to maintain 70% coverage on
the NPAs as on Sep-10, in stead of the current level.
q This would allow them to provide for new NPLs based on the older, and more
lenient, slab-wise provisioning norms.
q Surplus provision, if any, will have to be transferred to a separate account called
‘countercyclical provisioning buffer’ and banks will be allowed to use this for specific
provisions for NPAs during periods of system-wide downturn.
q Deficit provision, if any, will also be based on the amount of NPA as on Sep-10.
q These are interim norms and RBI will finalise provisioning standards based on
international standards as would be developed by the Basel Committee.
Banks should have been encouraged to raise coverage levels
q We are a bit surprised by RBI’s move as it has generally advocated creation of
counter-cyclical buffers.
q Therefore, we would have expected such a relaxation only when macros would have
turned adverse and not when they are stable.
q Moreover, Indian banks need to improve their NPL coverage ratio from 54% as on
Mar-10 (~70% including technical write-offs for banks under our coverage) to be at
par with banks in other economies. By Dec-10, coverage ratio (including technical
write-offs) for banks under our coverage had improved to ~75%.
q Additionally, their healthy profitability levels, moderating asset quality pressures
and reasonable capital adequacy would have enabled them to create buffers against
possible asset quality risks in future.
q A flat 70% coverage norm also forced Indian banks to pick best possible borrowers
as any slippage would necessitate high provision. However, the slab-wise norms
would require only a 10% provision.
2-4% earning upsides if NPL provisioning is 10% lower
q While banks cannot (1) write-back surplus provision or (2) use surplus against new
slippages unless prescribed by RBI, they may reduce provisioning on new NPLs.
q A 10% lower than estimated NPL provisioning could boost our earnings estimates
for FY12 by 2-4%.
q Banks with higher delinquencies and burden of provisioning like SBI, PNB and Union
may see higher upside risk.
q While lower NPL provisioning would boost earnings and ROA/ROE, it would be
neutral to adjusted book value (net worth minus net NPLs).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Relaxed provisioning norms
RBI has relaxed the NPL provisioning norm for banks from a flat 70% to
the older and more lenient slab-wise provisioning standard for new NPLs.
We are a bit surprised by this move as RBI has generally advocated for
counter-cyclical buffers. Moreover, Indian banks have a comparatively
lower NPL coverage ratio of sub 60% (~70% including write-offs) and
their healthy profitability and capital adequacy level could have supported
enhancement of coverage levels. We see 2-4% upside risk to earning
estimates for FY12 if provisions are 10% lower than estimates, but the
norms would be neutral to adjusted BVPS. Banks that are seeing higher
delinquencies like SBI, PNB and Union may see higher upsides risks.
RBI relaxes NPL provisioning norms
q Till recently, Indian banks were required to maintain specific loan loss reserve on
NPAs to the extent of 70%, including technical write-off of loans.
q RBI has relaxed this norm and has permitted banks to maintain 70% coverage on
the NPAs as on Sep-10, in stead of the current level.
q This would allow them to provide for new NPLs based on the older, and more
lenient, slab-wise provisioning norms.
q Surplus provision, if any, will have to be transferred to a separate account called
‘countercyclical provisioning buffer’ and banks will be allowed to use this for specific
provisions for NPAs during periods of system-wide downturn.
q Deficit provision, if any, will also be based on the amount of NPA as on Sep-10.
q These are interim norms and RBI will finalise provisioning standards based on
international standards as would be developed by the Basel Committee.
Banks should have been encouraged to raise coverage levels
q We are a bit surprised by RBI’s move as it has generally advocated creation of
counter-cyclical buffers.
q Therefore, we would have expected such a relaxation only when macros would have
turned adverse and not when they are stable.
q Moreover, Indian banks need to improve their NPL coverage ratio from 54% as on
Mar-10 (~70% including technical write-offs for banks under our coverage) to be at
par with banks in other economies. By Dec-10, coverage ratio (including technical
write-offs) for banks under our coverage had improved to ~75%.
q Additionally, their healthy profitability levels, moderating asset quality pressures
and reasonable capital adequacy would have enabled them to create buffers against
possible asset quality risks in future.
q A flat 70% coverage norm also forced Indian banks to pick best possible borrowers
as any slippage would necessitate high provision. However, the slab-wise norms
would require only a 10% provision.
2-4% earning upsides if NPL provisioning is 10% lower
q While banks cannot (1) write-back surplus provision or (2) use surplus against new
slippages unless prescribed by RBI, they may reduce provisioning on new NPLs.
q A 10% lower than estimated NPL provisioning could boost our earnings estimates
for FY12 by 2-4%.
q Banks with higher delinquencies and burden of provisioning like SBI, PNB and Union
may see higher upside risk.
q While lower NPL provisioning would boost earnings and ROA/ROE, it would be
neutral to adjusted book value (net worth minus net NPLs).
No comments:
Post a Comment