>Bank Retails (MERRILL LYNCH)

Provisioning norms for NPLs

■ New floating provision norms to impact reported net NPLs
The Reserve Bank of India (RBI) has come out with a notification highlighting the provisioning norms banks are expected to follow (see inside). The key change is in relation to ‘floating provisions’. We believe banks, going forward, may not be allowed to net-off floating provisions from gross NPLs, while reporting net NPL’s. Hence, it would raise the reported net NPL figure for banks’ having floating provisions. But the provisions still reside in the balance sheet. But banks can use floating provisions as Tier 2 capital, up to cap of 1.25% of risk-weighted assets.

■ Overall impact of new norms minimal for most banks
Most Indian Banks like HDFC Bank and SBI have minimal / any floating provisions on their balance sheets. Other banks like BOI, BOB have been using floating provisions as Tier 2 capital. However, banks like PNB, UBI, and ICICI Bk have been using these floating provisions to net-off against gross NPLs. We believe these would be most impacted, as discussed below.

■ UBI and PNB most impacted; ICICI Bk impact minimal
ICICI Bk has been netting-off against gross NPLs, although post change in norms, impact is minimal (see table 1). The biggest impact is on UBI and PNB as it was deducting its floating provision est. at +Rs5.1bn and Rs10bn, resp. Hence, their reported net NPL’s could rise by 2x and 4x for PNB and UBI, resp., although % of loans rise could be only 50bps and 70bps, resp. from reported 3QFY09 levels only on account of this accounting change. Although, impact on BV due to rise in Net NPLs limited to 6-7% for UBI and PNB. However, we strongly contend that this floating prov. does reside in B/S and hence, in our view, this does not materially change the underlying quality of a banks’ balance sheet as you cannot ignore provisions made by the bank.

■ Tier II capital may rise by 50-60bps
The positive takeaway is that it may shore up Tier II capital by 50-60bps of some of the govt. banks (especially those that have done restructuring). This, apart, from helping improve the overall capital position, may also ease some pressure on the funding costs (Tier II debt costs +9-10%), helping earnings, impact <1%.

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