Nomura expects the following impact on FY13E PAT to its PSU bank coverage: PNB – 5.1%; BOB – 3.8%; and SBI – 2.6%. The outstanding restructured loans for PNB, BoB (cumulative loans restructured) and SBI as a percentage of loans book are currently running at 9.4%, 7.2%, 4% (as of 1QFY13), respectively. This high level of restructured loans, coupled with elevated GNPL, poses a significant threat to earnings stability, in our view.
We reiterate our reduce on the PSU banks and prefer the private sector banks. The recommendation to increase prudential provisions on restructured loans follows the recommendations of Mahapatra Committee report which was set up to review the prudential guidelines on loan restructuring by banks & financial institutions. This group had recommended that prudential provisions against restructured loans be increased to 5% from the existing 2% over a period of two years. The RBI looks set to steer the Indian banks in that direction, in our view.
This increased provision requirement will clearly impact the PSU banks more than the private sector banks, we believe, due to their bloated restructured loan books. While the detailed guidelines regarding this increased provision requirement are yet to be announced by the RBI, we highlight the expected provision requirement for the three large PSU banks ? SBI, PNB and BOB ? and the expected impact to their FY13F PAT.
We examine the likely impact on FY13F PAT for our coverage universe if the higher provision level of 2.75% is levied on the outstanding restructured book and on incremental loans restructured. To estimate the incremental loan restructuring, we have assumed last three quarters average to be the run-rate for the remaining two quarters of FY13.
Our analysis suggest that the worst-hit banks would be PNB with an estimated possible 5.1% impact on its FY13F PAT; BOB with an estimated possible 3.8% impact on FY13F PAT; and SBI with an estimated possible 2.8% impact on its FY13F PAT. We have a reduce on PSU names on continued asset quality pressure. Our top buys in the India bank space are ICICI Bank, Axis Bank and IndusInd Bank, where we see negligible impact of this higher provisioning on FY13 PAT.
Nomura
