SectorSector Update| Financials
Update| 26 February 2016
Financials
RBI modifies guidelines for revitalizing stressed assets
Financial impact to be higher for PSBs, but unlikely to be meaningful
Please refer our detailed report
dated 22 February 2016
RBI has partly modified some aspects of the prudential guidelines for
revitalizing stressed assets.
The revised guidelines would be applicable
prospectively; however, banks have been advised to take similar action for past
accounts as well. The revised guidelines focus on plugging loopholes in the
existing guidelines for SDR, restructuring and JLF transactions, and reiterating /
clarifying other aspects. In our view, these guidelines would help reduce the
misuse of regulatory forbearance.
Further, as expected, RBI has asked banks to strengthen provisioning on SDR-
related exposure.
Banks are required to carry at least 15% provisioning on SDR
accounts and make additional provisions for MTM losses (if any) on converted
equity shares. In our view, this is likely to have a higher impact on PSU banks
(PSBs), considering their weak profitability. However, the impact on the industry
at large would be minimal, as most of the accounts are from restructured loans.
No specific requirement of higher provisioning for refinanced exposures under
5:25 scheme (widely expected) is a surprise. There could be another set of
guideline changes on the same in the ensuing days.
Some important aspects of the revised guidelines:
(a) In case of SDR
transactions, the threshold for asset classification benefit (NPA/RL to standard)
on divesting of stake to new promoter is reduced from 51% to 26%, (b) the
required number of lenders agreeing to restructuring / corrective action plan
(CAP) is reduced from 60% to 50% (will help in speeding up the process;
however, the requirement of 75% of lenders by value agreeing remains), (c)
accountability for restructuring and JLF transactions is clearly fixed (misuse likely
to reduce), (d) lenders incentivized to communicate their decision on the agreed
CAP within the specified time frame (refer exhibit 1).
RBI continues to focus on the health of bank balance sheets
– as we had
highlighted recently, multiple headwinds are likely to keep PSBs’ credit costs
elevated (report
link).
While the revised guidelines are expected to have
minimum impact on industry profitability, PSBs would continue to face the heat
from regulatory changes (MCLR implementation, lag impact of RBI AQR,
additional provision on SDR, and potentially higher provisioning requirement on
5:25 refinancing). Weak core PPoP and elevated credit costs would remain a
drag on overall profitability. Within our PSB coverage, we prefer BOB, SBIN and
INBK, which have relatively better asset quality position, relatively strong
capitalization, management continuity and focus on core operating parameters
(even at the cost of growth). Overall re-rating in PSBs could happen, with (a)
sharp pick-up in growth, leading to reduced risk on stress loan haircut
assumptions and increase in adjusted BV, (b) GoI taking action to address stress
loans in the balance sheet (bad bank, creation of stress assets fund, etc.), and (c)
clear path for large capital requirements of PSBs.
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
AS Venkata Krishnan
(A.Krishnan@MotilalOswal.com); +91 22 3010 2603 /
Dhaval Gada
(dhaval.gada@motilaloswal.com)
26 February 2016
Investors are advised to refer through important disclosures made at the last page of the Research Report.
1
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.