>BANKING SECTOR: Loan loss provisions under the Moody's stress tests
SECTOR QUICK COMMENT
We benchmark the loan loss provisions factored into our Axis and SBI estimates with the stress test assumptions outlined by Moody’s recently. For Axis, forecast LLPs of INR65bn over the next two years compare with INR44.2bn that would be required under the ‘adverse scenario’ and INR89.5bn under the ‘extremely adverse scenario’. For SBI, expected LLPs of INR344bn would become INR244.3bn and INR496.2bn for the two scenarios, respectively. Based on our current conservative LLPs, Axis trades at 1.6x FY13F ABV for an ROE of 18.4% and SBI trades at 1x FY13F ABV for an ROE of 17.1%.
In the current credit cost cycle, we expect loan loss provisions for the Indian banking sector to increase from 72bps in FY11 to 119bps in FY12F and 123bps in FY13F – due to credit quality deterioration in sectors like power, aviation, SME etc. This compares with the past peaks of 156bps in FY97 and 119bps in FY04. In their recent Banking System Outlook for India, Moody’s has detailed two stress case scenarios for asset quality – Adverse scenario and Extremely adverse scenario. The following table summarizes Moody’s assumptions for probability of default, loss-given-default and expected loss for the various loan categories under these two scenarios.
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In this note, we try to benchmark the provisions we have built into our estimates for Axis Bank and SBI through the next two years with the provisions that would have to be made under the two scenarios outlined by Moody’s.
· We apply the expected loss percentages under Moody’s adverse and extremely adverse scenarios to the loan book outstanding at the end of 2QFY12.
· Moody’s loan classification does not explicitly carve out ‘rural’ loans – the expected loss percentages are our assumptions.
Key points to note:
1) Axis Bank - The loan loss provisions built into our estimates for the next two years are INR65bn. This compares with INR44.18bn of losses that we believe would be likely under the adverse scenario and INR89.5bn under the extremely adverse scenario.
2) SBI - The loan loss provisions built into our estimates for the next two years are INR344.15bn. This compares with INR244.25bn of losses that we believe would be likely under the adverse scenario and INR496.15bn under the extremely adverse scenario.
3) Our current FY13F PAT for Axis and SBI is INR42.8bn & INR138.7bn – 12% and 6% below Bloomberg consensus, respectively.
4) AXSB currently trades at 1.6x FY13F adjusted book value, one standard deviation below its historical mean of 2.4x one-year forward ABV. Our TP of INR1,400 implies 2.4x FY13F ABV of INR 584 and 14.1x FY13E EPS of INR 99.62 for an ROA of 1.3% and ROE of 18.4%.
5) SBI trades at 1x FY13F ABV, one standard deviation below its historical mean of 1.7x one-year forward ABV. At our TP of INR2,400, SBI trades at 1.55x FY13F ABV of INR1,299 and 8.1x FY13F EPS of INR 209.67 for an FY13F ROA of 0.9% and adjusted ROE of 17.1%.
To read the full report: BANKING SECTOR
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