Mumbai: Profits of public sector banks such as Punjab National Bank (PNB), Indian Bank, Central Bank of India and Oriental Bank of Commerce (OBC) will be hit because of a likely increase in provisioning by the Reserve Bank of India (RBI) as these lenders will have to set aside more money to cover restructured loans, analysts said.
A Bank of America Merrill Lynch (BofA ML) report on Friday said PNB, Indian Bank and OBC with around 10% of their loans restructured, will be the worst hit
“We estimate at least 3-8% of earnings hit for the banks through fiscal 2014-15. Banks with higher provision cover (like Bank of Baroda and Union Bank of India) may have some cushion to offset the earnings hit,” analysts Rajeev Varma and Veekesh Gandhi wrote in the report.
A Mint analysis, based on the BofA ML report, suggests that Bank of Baroda, Bank of India, Canara Bank, IDBI Bank Ltd, Indian Bank, OBC, PNB, State Bank of India and Union Bank of India collectively will have to set aside at least Rs.3,870 crore to cover their restructured assets at the current level if RBI sticks to its plan of raising the provision requirement from 2.75% to 5%. This will be staggered over next nine quarters till April 2015.
The asset quality of many banks has suffered in the face of slowing economic growth and high interest rates that have made it difficult for many corporate borrowers to repay their loans. Banks have restructured the debt of many borrowers to avoid having to classify them as non-performing assets.
The draft guidelines, released on Thursday, suggested that banks must set aside money equivalent to 5% of new restructured loans from April and step up provisions for the stock of recast loans till April 2015.
Mid-level banks like Central Bank, Indian Bank and Allahabad Bank will be hit harder because their profits are not as large as their bigger rivals, said Varun Varma, banking analyst at Kim Eng Securities India Pvt. Ltd.
“These banks will suffer more because they will have to keep aside a larger amount of their revenues compared to big banks. The hike in provisions was expected as the RBI had hiked it in November but the amount is too large for these banks to be prepared,” Varma said.
Central Bank, for example, has restructured Rs.22,182 crore worth of loans as of December, which is 13.98% of its loan book and one of the highest in the industry. Its net worth at Rs.8,937.57 crore is much lower than the loans restructured. There is no link between the quantum of assets and a bank’s net worth as such but if a large portion of such loans eventually turns bad, the bank will be hit hard.
Saikiran Pulavarthi, an analyst at Espirito Santo Securities Ltd, said larger banks like PNB can withstand the hit. “For banks like PNB it won’t be more than 8% hit on the bottomline but for small banks it will be a greater challenge,” Pulavarthi said.
PNB had restructured loans worth Rs.28,542 crore as of December and has set aside Rs.785 crore for such loans. Over the next two years, the bank has to provide another Rs.642 crore. It earned a net profit of Rs.1,306 crore in the quarter ended December.
Rating agency Crisil Ltd, in a note on Friday, said RBI’s draft guidelines, if implemented, will take the banking sector’s provisioning requirement to Rs.15,000 crore between April 2013 and March 2015. This will lower banks’ profitability by around 7% in this period.
Still, the guidelines, if implemented, will enhance the confidence of stakeholders in banks’ asset quality and discourage large-scale debt restructuring, Crisil said.
According to Pawan Agrawal, senior director at Crisil, the guidelines will dissuade large-scale restructuring by raising the cost for banks; they will make viability assessment tighter and will stipulate higher promoter contribution in restructuring.
“The guidelines will strengthen the NPA (non-performing assets) recognition norms of banks by withdrawing regulatory forbearance for restructured loans, and proposing tighter norms for upgradation of NPAs from restructured accounts,” said Agrawal.
Another rating agency, ICRA Ltd, said the guidelines could likely increase NPAs steeply in 2015-16 from 3.6% as of 30 September 2012 to 6.5-7.5% in June 2015.
“This is so because regulatory forbearance on classification of old restructured advances (except for infrastructure loans yet to achieve commencement of operation) would cease by April 1, 2015,” ICRA said.
Bankers, however, are confident that they have enough time to increase provisions on their existing restructured loans without a knee-jerk reaction on profit.
S.L. Bansal, chairman of OBC, said his bank will have to keep aside about Rs.30 crore a quarter if the provisions are increased. “It won’t be much of an impact for the bank. But this will hopefully cut down on shallow restructuring and promoters will be held more accountable for loan recasts. Banks will be cautious before recasting any loan but that doesn’t mean genuine restructuring will be stopped,” he said.
Total loans restructured by Indian banks under the so-called corporate debt restructuring (CDR) route crossed Rs.2 trillion in December. In the past quarter alone, banks restructured Rs.24,584 crore of loans, up from the Rs.19,544 crore they recast in the previous quarter, to reach Rs.2.12 trillion of restructured loans. The actual figure for restructured loans may be around Rs.4 trillion as this estimate does not include bilateral restructuring cases that banks undertake individually with firms.