Significant stress addition for state-owned banks in FY12
Exposure to sensitive sectors moderates; large banks adequately capitalized
We analyzed state-owned banks' annual reports for FY12. Our key takeaways:
Banks restructured 3.1% of overall loans in FY12, of which ~20% pertains to CDR.
Overall NPV loss / sacrifice was contained at 4% of overall restructured loans.
Aggregate gross slippage ratio was 2.6% (2.2% in FY11) and net slippage ratio was 1.7%
(1.3% in FY11). GNPAs and NNPAs were up 54% YoY and 58% YoY respectively.
Growth in overall Power sector exposure moderated from 70% in FY11 to 19% in
FY12. Infrastructure segment constituted 13.7% of overall funded exposure.
Core tier-I ratio increased 50bp to 8.9%, led by infusion of equity by the government.
Large-cap banks are better placed than their smaller counterparts.
TOP PICKS: ICICIBC (strong capitalization and asset quality; improving return ratios),
SBIN (lowest net stress loan among state-owned banks and healthy core operations),
YES (healthy asset quality performance and attractive valuations) and OBC (valuation
factors in negatives).
Asset quality impacted by higher slippages and restructuring
Banks restructured 3.1% of overall loans in FY12. Of these, ~20% pertains to CDR.
Excluding SBIN, state-owned banks restructured 4% of overall loans. Sacrifice/
NPV loss absorbed was contained at ~4% of loans restructured, with sacrifice on
CDR cases at ~15%. While gross slippages increased 48% YoY, the pace of recoveries
and upgradations moderated to 21% YoY, leading to higher balance sheet stress.
Aggregate gross slippage ratio was 2.6% (2.2% in FY11) and net slippage ratio was
1.7% (1.3% in FY11). GNPAs were up 54% YoY and NNPAs 58% YoY. PCR declined for
most banks. Despite higher pressure on asset quality, SBIN was the lone large-cap
bank that reported improvement in PCR (calculated) from 51% in FY11 to 60%.
Growth in Power sector exposure moderates; exposure to sensitive
sectors declines marginally
With concerns relating to the Power sector coming to the forefront, banks
became cautious in lending to the segment. As a result, growth in state-owned
banks' overall Power (including Electricity) sector exposure moderated from
70% in FY11 to 19% in FY12. Exposure to sensitive sectors as a percentage of
overall exposure declined marginally to 28.7% v/s 29.2% in FY11. The exposure
to sensitive sectors varies from bank to bank with SBIN (among large cap) and
INBK (among mid-cap) having the lowest exposure, and PNB and ANDB having
the highest. [Note: We have taken the following as sensitive sectors: (1) Metals,
(2) Infrastructure (including Electricity), (3) Gems and Jewelry, (4) Textiles, (5)
Commercial real estate and (6) Capital Market.]
Banks with higher deposits maturing in 2HFY13 enjoy advantage
Banks with greater percentage of their deposits maturing in 2HFY13 will be in an
advantageous position, considering the expected fall in interest rates. CBK and
ANDB have the highest percentage of deposits maturing in 2HFY13, followed by
BOB, DBNK and CRPBK. SBIN, PNB and BOI have a low percentage of deposits maturing
in 2HFY13. Hence, maintaining yield on assets will be imperative to protect adverse
impact on margins.
Capitalization remains largely healthy
In the last two years, the government of India (and LIC) infused INR255b in stateowned
banks (15% of FY10 net worth) to keep their capitalization healthy. Tier-I and
core tier-I ratio for the state-owned banks under our coverage increased from 9%
and 8.4% to 9.5% and 8.9%, respectively over the last two years. INBK and BOB's core
tier-I ratio stands at 10%+; for SBIN, core tier-I ratio increased significantly from 7.7%
in FY11 to 9.3% in FY12 led by capital infusion of INR79b and better utilization of
capital. However, for BOI, UNBK, CRPBK and IOB, core tier-I ratio remains sub-8%
despite capital infusion. Such banks would be required to raise capital, especially
given the emphasis on core equity under Basel III.
Discounting factor increased in FY12; salary escalation assumptions
unchanged
Salary escalation assumptions remain largely stable for most banks. The highest
salary rise has been assumed by OBC and CRPBK. In line with the trend of rising
interest rates (G-sec yields), some state-owned banks increased the discount rate
applied for calculation of pension liabilities in FY12. Therefore, pension costs would
be lower to that extent. BOI and UNBK have been the most aggressive in their
assumptions of discounting factor; ANDB has been the most conservative.
Sector strategy: Prefer SBIN, ICICIBC, YES, OBC
Policy logjam, uncertain macroeconomic environment, weak business sentiments
and banks' risk aversion will keep business growth tepid in near term. Continued
comfortable liquidity, government action on some of the key policy decisions and
reduction in interest rate could significantly alter the growth and asset quality
concerns, which would be positive.
Strong core operations and robust asset quality of Private Banks is reflecting in their
premium valuations vis-a-vis state-owned banks. Top large cap picks: SBIN and ICICIBC.
Among mid-caps, we like YES and OBC.
Capitalization remains largely healthy
However, Basel III to raise challenges for mid-cap banks
In the last two years, the government of India (and LIC) infused INR255b in state-owned
banks (15% of FY10 net worth) to keep their capitalization healthy.
Tier-I and core tier-I ratio for the state-owned banks under our coverage have increased
from 9% and 8.4% to 9.5% and 8.9%, respectively over the last two years.
INBK and BOB's core tier-I ratio stands at 10%+; for SBIN, core tier-I ratio increased
significantly from 7.7% in FY11 to 9.3% in FY12.
However, for BOI, UNBK, CRPBK and IOB, core tier-I ratio remains sub-8% despite capital
infusion. Such banks would be required to raise capital, especially given the emphasis on
core equity under Basel III.
Large-cap banks adequately capitalized
Core tier-I ratio for state-owned banks has increased by 50bp over the last two years,
led by capital infusion by the government and lower growth in RWA. The government
(and LIC) infused capital of INR95.8b in FY11 and INR159.1b in FY12 - cumulative equity
infusion of INR255b over FY11-12. Large-cap state-owned banks are relatively better
placed, with core tier-I ratio at 9%+. Among large-cap banks, BOB has the highest core
tier-I ratio at 10.1%, followed by CBK at 9.6%. CBK had raised capital of INR19.9b by
way of QIP, leading to strong improvement in capital adequacy ratio. Government
holding still remains at 67.7%, giving the bank opportunity to raise capital through
other sources.
Significant improvement in SBIN's core tier-I capital
SBIN's core tier-I ratio has improved significantly from 7.8% in FY11 to 9.8% in FY12,
led by a combination of factors: (1) equity infusion of INR79b, (2) internal accruals of
INR89.7b, and (3) realignment of portfolio by insuring some of its SME portfolio and
export-related loans in credit guarantee scheme - RWA grew 2% in FY12 compared to
15% loan growth and 10% balance sheet growth.
Mid-cap banks would be required to shore up capital
Among mid-cap banks, INBK has the highest core tier-I ratio at 10.7%. However, some
of the other banks would be required to shore up capital, as their core tier-I ratio is
below 8%. RWA growth for mid-cap banks has been higher than loan and balance
sheet growth, which has further resulted in some pressure on capital adequacy ratio.
Under Basel III, core emphasis has been placed on core equity. It would be a challenge
for some mid-cap banks to shore up capital.
Pension cost lower - discount rate revised upwards
Salary escalation assumptions unchanged
In line with the rising interest rate (G-sec yields) trend some state-owned banks increased
the discount rate applied for calculation of pension liabilities in FY12. Therefore, pension
costs would be lower to that extent.
BOI and UNBK have been the most aggressive in their assumptions of discounting factor;
ANDB has been the most conservative.
Salary escalation assumptions remain largely stable for most banks. The highest salary
rise has been assumed by OBC and CRPBK.
Salary escalation assumptions unchanged; pension cost could be lower
Most of the state-owned banks have kept their salary escalation assumptions
unchanged. Salary escalation assumptions are the lowest for ANDB at 3% and the
highest for OBC at 6%. For SBIN and PNB, the salary escalation assumption is 5%.
Canara Bank's salary escalation assumption is 4%, but this has been brought down
from 7% in FY10.
Large-cap state-owned banks (ex-SBIN) have increased their discount rate assumptions
by 20-50bp in FY12. This is on the back of an upward revision in FY11. Thus, the
cumulative increase in discount rate has been 40-100bp. Therefore, the pension cost
would be lower. The discounting assumptions for BOI and UNBK remain the most
aggressive at 9%. For other state-owned banks, the discounting assumptions are in
8.4-8.75% range. ANDB's assumption is the most conservative at 8.4%.
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