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India Equity Research Reports, IPO and Stock News
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Banks/Financial Institutions
India
Relief on coverage ratio requirements. RBI’s latest circular requires banks to
maintain a provision coverage ratio of 70% on NPLs as of September 2010 till a more
comprehensive guideline on counter-cyclical buffer is introduced. We see limited impact
as most banks have reached their coverage ratios. Only SBI and IOB have lower
provisioning coverage and may get some timing benefit. Overall, we do not expect any
material earnings impact, though volatility will reduce. We maintain our positive
outlook on asset quality and expect loan loss provisions to decline in FY2012-13E.
Provision coverage of 70% to be maintained only for gross NPLs as of September 2010
RBI’s latest guideline has revised the requirement for maintaining 70% coverage ratio on gross
NPLs. Gross NPLs (including the portfolio of technically written-off loans) as of September, 2010
would be considered for calculating this ratio. The primary motivation behind this move is the
comfort RBI has seen with most banks having now built a strong coverage ratio and probably
driven by an improvement in the underlying economy. The RBI did indicate that this would be
suspended till a more comprehensive methodology to build counter cyclical buffer is introduced.
We see the lack of a floor or minimum coverage ratio in this guideline as negative as banks could
relax their provisioning policy in the event of large slippages.
Near-term impact limited with most banks comfortable in their respective coverage ratios
We see limited impact as most banks have already reached their regulatory requirements. SBI and
IOB were the few banks which are yet to reach the required coverage ratio and given their strong
profitability and current coverage ratio at 65% levels, we did expect them to meet by their
respective scheduled timeline. Fresh additions to NPLs did see a slowdown in 3QFY11 on the back
of improved economic environment for the sector- giving confidence to the regulator to relax on
maintaining higher provisioning requirements. However, meeting this on an ongoing basis would
not have been difficult for banks as recoveries are improving along with lower fresh slippages.
However, the guideline does offer relief from a medium term perspective for public sector banks.
With a bulk of their loans dominated by corporate segment, especially in large ticket infrastructure
portfolio, this guideline provides relief as temporary slippages can result in huge volatility in
earnings to meet the 70% coverage ratio guideline on an ongoing basis.
Maintain positive outlook on asset quality and expect loan loss provisions to decline in FY2012E
We maintain our positive outlook on asset quality, slippages and consequently on earnings profile
for FY2012 for all banks. We expect slippages to decline to 1.5% levels in FY2012-13E from 2%
levels witnessed in the previous three years. The impact of slippages from weakening macro
economic conditions (as well as from restructured assets), agriculture debt waiver, recognizing
NPLs without manual intervention and meeting 70% regulatory coverage ratios resulted in loan
loss provisions increasing to 1-1.1% of loans in FY2010-11.
As conditions improve, we expect loan loss provisions to decline to about 80 bps with a favorable
bias on the back of better recovery. We expect banks to improve their coverage ratio (without
write-off) as a prudential measure to strengthen their balance sheets and prevent any serious
volatility in earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks/Financial Institutions
India
Relief on coverage ratio requirements. RBI’s latest circular requires banks to
maintain a provision coverage ratio of 70% on NPLs as of September 2010 till a more
comprehensive guideline on counter-cyclical buffer is introduced. We see limited impact
as most banks have reached their coverage ratios. Only SBI and IOB have lower
provisioning coverage and may get some timing benefit. Overall, we do not expect any
material earnings impact, though volatility will reduce. We maintain our positive
outlook on asset quality and expect loan loss provisions to decline in FY2012-13E.
Provision coverage of 70% to be maintained only for gross NPLs as of September 2010
RBI’s latest guideline has revised the requirement for maintaining 70% coverage ratio on gross
NPLs. Gross NPLs (including the portfolio of technically written-off loans) as of September, 2010
would be considered for calculating this ratio. The primary motivation behind this move is the
comfort RBI has seen with most banks having now built a strong coverage ratio and probably
driven by an improvement in the underlying economy. The RBI did indicate that this would be
suspended till a more comprehensive methodology to build counter cyclical buffer is introduced.
We see the lack of a floor or minimum coverage ratio in this guideline as negative as banks could
relax their provisioning policy in the event of large slippages.
Near-term impact limited with most banks comfortable in their respective coverage ratios
We see limited impact as most banks have already reached their regulatory requirements. SBI and
IOB were the few banks which are yet to reach the required coverage ratio and given their strong
profitability and current coverage ratio at 65% levels, we did expect them to meet by their
respective scheduled timeline. Fresh additions to NPLs did see a slowdown in 3QFY11 on the back
of improved economic environment for the sector- giving confidence to the regulator to relax on
maintaining higher provisioning requirements. However, meeting this on an ongoing basis would
not have been difficult for banks as recoveries are improving along with lower fresh slippages.
However, the guideline does offer relief from a medium term perspective for public sector banks.
With a bulk of their loans dominated by corporate segment, especially in large ticket infrastructure
portfolio, this guideline provides relief as temporary slippages can result in huge volatility in
earnings to meet the 70% coverage ratio guideline on an ongoing basis.
Maintain positive outlook on asset quality and expect loan loss provisions to decline in FY2012E
We maintain our positive outlook on asset quality, slippages and consequently on earnings profile
for FY2012 for all banks. We expect slippages to decline to 1.5% levels in FY2012-13E from 2%
levels witnessed in the previous three years. The impact of slippages from weakening macro
economic conditions (as well as from restructured assets), agriculture debt waiver, recognizing
NPLs without manual intervention and meeting 70% regulatory coverage ratios resulted in loan
loss provisions increasing to 1-1.1% of loans in FY2010-11.
As conditions improve, we expect loan loss provisions to decline to about 80 bps with a favorable
bias on the back of better recovery. We expect banks to improve their coverage ratio (without
write-off) as a prudential measure to strengthen their balance sheets and prevent any serious
volatility in earnings.
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