[Investors Please Listen] Banking - RBI guidelines-increased Net NPA; No economic impact; sector update

 

The Reserve Bank of India (RBI) has issued a new set of guidelines on various loan provisions. Overall, these guidelines are unlikely to have any significant impact on our estimates. While there is no economic impact, net NPA ratios of some banks are likely to increase 50-100bps and tier-II capital ratios will go up by 60-80 bps.

 

Key highlights of new RBI guidelines

As per the new guidelines, floating provisions cannot be netted from gross NPAs to arrive at net NPAs. Until recently, some banks were using floating provisions as part of their provision coverage, which kept their reported net NPA ratios low. Now, when these floating provisions will cease to be a part of the provision coverage, reported net NPA ratios of these banks will rise; also, provision coverage will come down without any change in gross NPA numbers.

 

We are puzzled by the timing and nature of these guidelines as it penalizes the banks which have strengthened the balance sheet in the past by creating these floating provisions. However on the positive side, this will give much clearer picture of specific provisioning policies of each bank.

 

The reported net NPA ratio will increase 70-100bps for Punjab National Bank (PNB), Federal Bank and Union Bank. As these banks had net NPA ratio of less than 0.5% as of December 2008, an increase in net NPA/fall in provision coverage could have some sentimental negative impact. Private banks and State Bank of India (SBI) are unlikely to be materially impacted as they do not have floating provisions.

 

We would expect the affected banks to seek one-time approval to create specific provisions by using existing floating provisions.

 

Our view –No Economic impact

We believe that the increase in net NPA of a bank is negated by the existing understatement of core book of the bank, thus implying zero impact on the adjusted book value.

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[Investors Please Listen] Bond Supplies - Government doles out 2/3rds of budgeted FY10 borrowing in H1FY10

Government doles out 2/3rds of budgeted FY10 borrowing in H1FY10

As we enter into FY10 when the government and RBI are expected to steer the economy from the ongoing slump through various monetary and fiscal tools and the tax kitty is likely to shrink due to the rates reduction and the overall economic contraction, capital receipts will play a significant role in financing the INR 9.5 tn expenditure bill.

 

The RBI, on March 26, announced the H1FY10 borrowing program at INR 2.41 tn, with an estimated weekly borrowing (bonds, bills and state development loan, SDL) of INR 230 bn (table 1). Given below are some details of the borrowing program:

n         Compared with INR 960 bn in H1FY09, INR 2410 bn will be auctioned in H1FY10.

n         With debt servicing of INR 1.01 tn in H1FY10, net borrowing is INR 1.41 tn.

n         Of INR 1.01 tn, INR 330 bn is in bond redemptions and remaining in interest payments.

n         OMO buyback would continue over the next 6-months; INR 800 bn worth bonds are expected to be bought back, equally distributed over the two quarters.

n         MSS bonds and bills worth INR 420 bn would be unwound over H1 FY10, INR 375 bn in Q1 and rest over next quarter.

n         In Q1FY10, the monthly issuance will be INR 480 bn against INR 320 bn in Q2.

 

The benchmark yield shot 20bps to 7.18% as a knee jerk to borrowing programme release; however, it recovered and closed at 7%. As the details of the financing the auction through OMO and MSS unwinding was released after market hours we can anticipate positive opening on March 30.

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Stimulus II- sectoral approach

As compared to the Stimulus I that cut across every business segments by
reducing Cenvat by 4%, Stimulus II is trying to address certain specific sectors
like infrastructure, real estate, CVs, metals and cement. It not only provides for
funding through NBFC/bank/ECBs but also charts path for NBFC/banks to raise
finance. The issue in the current sluggish economy is availability of finance at a
reasonable cost. The freedom provided to real estate companies to raise funds for
integrated townships look very positive apparently but is very difficult
considering the fact that the ECB finance is dried out. Depreciation benefit to CV
companies may not improve the demand but it can certainly reduce inventories.
Any move to help the industries by using PSU banks line of credit would benefit
the relevant sectors but could raise a question on quality of assets of the PSU
banks and the history on similar moves have not been very encouraging for PSU
bank’s health. The role of infrastructure NBFC and IIFCL will be crucial for the
growth of the sector. We might see some announcements from large industry
players to form infra NBFCs.

Stimulus II- sectoral approach

As compared to the Stimulus I that cut across every business segments by
reducing Cenvat by 4%, Stimulus II is trying to address certain specific sectors
like infrastructure, real estate, CVs, metals and cement. It not only provides for
funding through NBFC/bank/ECBs but also charts path for NBFC/banks to raise
finance. The issue in the current sluggish economy is availability of finance at a
reasonable cost. The freedom provided to real estate companies to raise funds for
integrated townships look very positive apparently but is very difficult
considering the fact that the ECB finance is dried out. Depreciation benefit to CV
companies may not improve the demand but it can certainly reduce inventories.
Any move to help the industries by using PSU banks line of credit would benefit
the relevant sectors but could raise a question on quality of assets of the PSU
banks and the history on similar moves have not been very encouraging for PSU
bank’s health. The role of infrastructure NBFC and IIFCL will be crucial for the
growth of the sector. We might see some announcements from large industry
players to form infra NBFCs.

Fortnightly round up of key banking and economic indicators

n While the growth in the non-food credit was at 26.2%, the deposits growth remains lower at 21.4% for the week ended December 05, 2008.

n The incremental CD ratio was higher at 88% for the week ended 05 December 2008, however down from 97.7% in the last month.

n Inflation for the week ended December 06, 2008 falls significantly to 6.84% as compared to 8.0% reported in the last week.

n Call rates firmed during the week and was hovering around upper end of the LAF corridor as the advance tax outflow tightened liquidity.

n Events to watch –India Trade balance & WPI and US GDP.

Fortnightly round up of key banking and economic indicators

n While the growth in the non-food credit was at 26.2%, the deposits growth remains lower at 21.4% for the week ended December 05, 2008.

n The incremental CD ratio was higher at 88% for the week ended 05 December 2008, however down from 97.7% in the last month.

n Inflation for the week ended December 06, 2008 falls significantly to 6.84% as compared to 8.0% reported in the last week.

n Call rates firmed during the week and was hovering around upper end of the LAF corridor as the advance tax outflow tightened liquidity.

n Events to watch –India Trade balance & WPI and US GDP.

The recent Monetary and Fiscal measures announced to boost the economy

Monetary measures

RBI announced monetary measures on 6th Dec (Saturday). RBI cut the policy rates but it kept the Cash Reserve Ratio, External Commercial Borrowing norms and Statutory Liquidity Requirement unchanged. However it reiterated that it wants to keep call rate within the repo and reverse repo rate indicating that liquidity remains the key concern.

Fiscal Stimulus Package

The Govt of India on Sunday (7th Dec) announced Rs 30,700 cr fiscal stimulus package primarily comprising of additional spending and excise duty cuts to boost consumption and to minimize the impact of financial crisis and global slowdown on the Indian economy. The government has proposed to increase plan expenditure by Rs 20,000 cr (0.4% of GDP). The total fiscal deficit comes to 6.4% of GDP (without considering the state deficits). However, considering the current environment, higher fiscal deficit is tolerable as it is an appropriate “counter-cyclical” policy.

The recent Monetary and Fiscal measures announced to boost the economy

Monetary measures

RBI announced monetary measures on 6th Dec (Saturday). RBI cut the policy rates but it kept the Cash Reserve Ratio, External Commercial Borrowing norms and Statutory Liquidity Requirement unchanged. However it reiterated that it wants to keep call rate within the repo and reverse repo rate indicating that liquidity remains the key concern.

Fiscal Stimulus Package

The Govt of India on Sunday (7th Dec) announced Rs 30,700 cr fiscal stimulus package primarily comprising of additional spending and excise duty cuts to boost consumption and to minimize the impact of financial crisis and global slowdown on the Indian economy. The government has proposed to increase plan expenditure by Rs 20,000 cr (0.4% of GDP). The total fiscal deficit comes to 6.4% of GDP (without considering the state deficits). However, considering the current environment, higher fiscal deficit is tolerable as it is an appropriate “counter-cyclical” policy.

Indian Financial Sector Who's Got The Exposure?

Sector loan growth has accelerated to 27.6% YoY as of 7 November, despite slowing economic growth. Though partly driven by higher oil company borrowing, industrial loan growth ex-oil also accelerated to 27.6% YoY (August 2008 data).

Growth in some potentially higher risk segments like real estate, construction, metals, finance companies and credit cards also remains high, and has actually accelerated.

Our recent conversation with banks indicates stress is emerging in exports, driven sectors such as textiles, auto ancillaries, gems & jewellery, commodity sectors, real estate and commercial vehicles.

Bank-wise data shows that BOB, BOI, PNB and SBI have relatively higher export-driven and metals exposure. IOB and Indian have relatively higher real estate/construction exposure, while Canara and Indian have high infrastructure exposure.

Among these stocks, Canara and IOB also have low coverage as well as low Tier I, which is a cause for concern.

In addition, Axis has large non-funded exposure to gems and jewellery segment (~11% of total credit exposure as of March 2008).

Indian Bank and IOB reported large NPLs in real estate portfolio in 2Q. With the recent restructuring guidelines mandating classification of restructured real estate loans as sub-standard, there is clearly a risk of a sharp up-tick in NPLs from this segment in the coming
quarters.

Canara and Indian have relatively high infrastructure exposure, while the SBI group’s exposure to infrastructure is a relatively low 6%, despite its dominating presence in the space. This gives an indication of its balance sheet size and diversity of asset base.

Indian Financial Sector Who's Got The Exposure?

Sector loan growth has accelerated to 27.6% YoY as of 7 November, despite slowing economic growth. Though partly driven by higher oil company borrowing, industrial loan growth ex-oil also accelerated to 27.6% YoY (August 2008 data).

Growth in some potentially higher risk segments like real estate, construction, metals, finance companies and credit cards also remains high, and has actually accelerated.

Our recent conversation with banks indicates stress is emerging in exports, driven sectors such as textiles, auto ancillaries, gems & jewellery, commodity sectors, real estate and commercial vehicles.

Bank-wise data shows that BOB, BOI, PNB and SBI have relatively higher export-driven and metals exposure. IOB and Indian have relatively higher real estate/construction exposure, while Canara and Indian have high infrastructure exposure.

Among these stocks, Canara and IOB also have low coverage as well as low Tier I, which is a cause for concern.

In addition, Axis has large non-funded exposure to gems and jewellery segment (~11% of total credit exposure as of March 2008).

Indian Bank and IOB reported large NPLs in real estate portfolio in 2Q. With the recent restructuring guidelines mandating classification of restructured real estate loans as sub-standard, there is clearly a risk of a sharp up-tick in NPLs from this segment in the coming
quarters.

Canara and Indian have relatively high infrastructure exposure, while the SBI group’s exposure to infrastructure is a relatively low 6%, despite its dominating presence in the space. This gives an indication of its balance sheet size and diversity of asset base.