[T.S.R:17541] Macquarie-Indian Banks Are Playing On A Damp Wicket

Macquarie

India Banks-Playing On A Damp Wicket

NPLs To Infra, Real Estate Doubled in FY11; SBI refused amortisation of pension liabilities over the next few years and whacked for not foreseeing and planning for liabilities instead of providing for them in Q4 FY11; many state run banks are inadequately capitalised even by the Basel II norms and will need GOI funding during FY12. We present our takeaways from the financial stability report of RBI. 

RBI is wary of pension issue in PSU banks and wants them to proactively provide:

RBI very clearly has said that going forward banks need to build adequate provisions for pension liabilities in a phased manner inorder that regulatory dispensation to amortise or take it off the reserves is not sought and the burden is not concentrated in the year that the settlement is signed. RBI has said that there are systemic stability issues arising out of under-provisioning and has taken up the matter with IBA. Infact RBI has also pointed out that it did not agree on SBI's request to amortise the pension liabilities, as it felt that the liability could have been reasonably anticipated. 

Real estate, agri and infra saw sharp rise in NPLs last year: NPLs in the commercial real estate segment for banks have increased from 1.6% to 2.3% in the past one year and the absolute level of NPLs in this segment has gone up by a significant 70% last year, particularly for state owned banks. Prioritysector portfolio also saw a very sharp deterioration last year with agri NPLs increasing 60%. This, we believe, was due to the moral hazard created due toagriculture debt waiver. The infrastructure sector witnessed a 43% rise in NPLs last year though the Gross NPL level remains low at 0.5%. 

Increased ALM mismatches of banks a worry: RBI has highlighted that the share of borrowings and CDs in banks' liabilities rose to about 10% in 2011 from about 8% a year ago. Concerns about increasing reliance on borrowed funds were further exacerbated by growing mismatches in the maturity profile of deposits and advances. While more deposits than advances were getting re-priced in the near term (less than a year) bucket, more advances than deposits were maturing in 1-3 year and 3-5 year buckets. These mismatches entailed considerable rollover risks for banks.

Growth in infra very strong, power sector NPLs currently very small: The overall infra exposure has grown above 40% last year and constituted nearly 13% of overall credit in FY11 (up from 11% a year ago). Power sector forms nearly 42% of overall outstanding credit and has been growing at 50%+. The roads and port sectors have been the largest contributors to NPLs with the gross NPL ratio at 80bps compared to 10bps for the power sector.   

Current CAR comfortable but capital raising is likely in FY13: The current CAR of Indian banks is around 14.3%. According to RBI the Indian banking system is unlikely to be unduly stretched in meeting the more stringent requirements of the Basel III proposals. However, an internal study of RBI(based on credit growth projections) shows that the CAR of several banks falls below the minimum regulatory requirements, even under a Basel II scenario, indicating that capital will need to be augmented in the coming years. The capital needs of banks will also be impacted due to the unamortized portion of pension liabilities to be absorbed by April 01, 2013 on migration to International Financial Reporting Standards.
 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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