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India Equity Research Reports, IPO and Stock News
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http://content.icicidirect.com/mailimages/ICICIdirect_DynamicProvision_EventUpdate.pdf
D y n a m i c p r o v i s i o n - s ti l l t i m e t o c o m e
The RBI discussion paper on the Dynamic Provisions (DP) framework
specifies the need to make a counter cyclical buffer in the name of “stock
of DP”. This would be created during favourable economic conditions,
which can be utilised for covering higher defaults during a slowdown or
an economic downturn. The objective is to prevent volatility in the
earnings profile of the banks owing to uncertain provisioning during
slowdown and favourable economic conditions.
On implementation, total provisions will include only dynamic provision
(DP) and specific provision (SP) instead of the currently existing specific,
floating and general provisions. Further, on implementation of the policy
the provisioning requirements will increase considerably.
Banks that have maintained higher provisions mainly the specific
provisioning and have lower credit default history will be impacted the
least. Despite the short-term hitch such a frame work augurs well for the
banking sector in the long term as it will smoothen the earnings profile.
We have tried to calculate the impact of DP on FY13E RoA. The impact on
RoA shall be viewed as just an indicator and the quantum of impact on
RoA may not be reliable as the exact asset mix may be different and all
parameters are not yet clear. Some banks may use their own parameters
i.e. historical data, credit profile and model to calculate DP while others
may use the RBI guidelines. However, we do not expect the norm to be
implemented soon and it may spill over to FY14.
For banks under our coverage, FY13E RoAs may be impacted by 10 - 40
bps depending on their asset mix and existing provisioning policy.
However, the actual impact may be slightly lower than our calculation as
lack of data remains a constraint. If the DP norms are implemented in the
current form, it will be negative for the banking sector in the initial year of
implementation as it impacts RoA negatively. This can have a bearing on
P/ABV multiples that banks are currently trading at. However, on the
positive side, it will reduce the volatility in earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://content.icicidirect.com/mailimages/ICICIdirect_DynamicProvision_EventUpdate.pdf
D y n a m i c p r o v i s i o n - s ti l l t i m e t o c o m e
The RBI discussion paper on the Dynamic Provisions (DP) framework
specifies the need to make a counter cyclical buffer in the name of “stock
of DP”. This would be created during favourable economic conditions,
which can be utilised for covering higher defaults during a slowdown or
an economic downturn. The objective is to prevent volatility in the
earnings profile of the banks owing to uncertain provisioning during
slowdown and favourable economic conditions.
On implementation, total provisions will include only dynamic provision
(DP) and specific provision (SP) instead of the currently existing specific,
floating and general provisions. Further, on implementation of the policy
the provisioning requirements will increase considerably.
Banks that have maintained higher provisions mainly the specific
provisioning and have lower credit default history will be impacted the
least. Despite the short-term hitch such a frame work augurs well for the
banking sector in the long term as it will smoothen the earnings profile.
We have tried to calculate the impact of DP on FY13E RoA. The impact on
RoA shall be viewed as just an indicator and the quantum of impact on
RoA may not be reliable as the exact asset mix may be different and all
parameters are not yet clear. Some banks may use their own parameters
i.e. historical data, credit profile and model to calculate DP while others
may use the RBI guidelines. However, we do not expect the norm to be
implemented soon and it may spill over to FY14.
For banks under our coverage, FY13E RoAs may be impacted by 10 - 40
bps depending on their asset mix and existing provisioning policy.
However, the actual impact may be slightly lower than our calculation as
lack of data remains a constraint. If the DP norms are implemented in the
current form, it will be negative for the banking sector in the initial year of
implementation as it impacts RoA negatively. This can have a bearing on
P/ABV multiples that banks are currently trading at. However, on the
positive side, it will reduce the volatility in earnings.
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