BFSI - Wage Revision: Treading Off The Beaten Track; Sector Update :: Edelweiss

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We interacted with actuaries and Indian Banks Association (IBA) spokesperson to gain further clarity on the wage revision agreement entered into by banks and unions yesterday (February 23, 2015). The key highlight was, of the INR47.25bn hike in salary slip component (highlighted in press release), the increase due to basic salary is merely INR6bn (implying 2% rise in basic salary component against Street’s estimate of more than 10%). Hike in basic salary is a relevant parameter as pension obligation is directly correlated only to rise in basic salary and not allowances, implying that banks’ pension liability will rise a mere 2% post the current wage revision. This, when seen in conjunction with the fact that transitional liability will be done away with in FY16, will result in net write-back for banks, which in turn will aid earnings.

Wage revision impact: Negligible pension hit

In stark contrast to the earlier belief that basic salary hike will be in early teens, it is just 2% and the balance is on other allowance (first instance where such a low hike in basic salary is agreed upon). This will essentially reduce banks’ future pension liabilities as it is related to the basic component. This, when seen in the light of the fact that transitional liabilities will wane from FY16, will lead to see much lower hit on employee cost going forward.

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https://www.edelweiss.in/research/BFSI--Wage-Revision-Treading-Off-The-Beaten-Track;-Sector-Update/28461.html