People stand in line to exchange Indian five hundred and one thousand rupee banknotes outside the Reserve Bank of India (RBI) headquarters in New Delhi, India, on Thursday, Nov. 10, 2016. (Photographer: Anindito Mukherjee/Bloomberg)

RBI’s New Provisioning Norms Will Hurt Bank Earnings, Push Up Credit Costs, Say Brokerages 

The Reserve Bank of India’s move to seek higher provisioning against insolvency cases will pose risks to earnings and capital ratios of banks, according to brokerages.

The RBI has asked banks to set aside 50 percent provision against the secured portion of these loans and 100 percent provision against the unsecured part, two public sector bankers said on condition of anonymity. The additional provisions can be spread over three quarters starting the next three-month period, said the bankers. RBI did not respond to an email sent by BloombergQuint on Monday.

Government-owned banks will be most vulnerable to incremental provisioning requirements, JPMorgan said in a note to clients. The new measures could also increase credit costs for banks, according to Morgan Stanley, which expects the provisioning burden to remain elevated even in the next financial year.

Credit Suisse sees a silver lining. The new provisioning policy will make banks more open to taking larger haircuts on stressed accounts, and pave the way for consolidation, especially in the steel sector, according to the brokerage.

Earlier this month, the RBI asked banks to refer 12 large stressed accounts for resolution under the Insolvency & Bankruptcy Code. These accounts make up about 25 percent of the total gross non-performing assets in the banking system, the regulator had said.

Here’s are the highlights of what top brokerages had to say:

JP Morgan

  • Incremental provisioning need poses a significant risk to earnings and capital ratios.
  • Expect the RBI to continue to tighten recognition and provisioning norms.
  • Continue to be cautious on banks with higher proportion of bad loans; reiterate HDFC Bank Ltd., IndusInd Bank Ltd. and Yes Bank Ltd. as top picks.
  • Prefer Axis Bank Ltd. and ICICI Bank Ltd. within the banks with more bad loans.
  • PSU banks, especially Bank of Baroda and Punjab National Bank, are the most vulnerable to tighter provisioning requirements; reiterate underweight ratings on both stocks.
  • More cautious on State Bank of India post the RBI move on worries that post-merger provisioning requirements may put pressure on earnings.

Morgan Stanley

  • Provisioning on these loans could increase from the current 30-40 percent to 60 percent.
  • Implies 40-90 basis points increase in credit cost for the system this financial year.
  • More accounts could be referred by banks for insolvency and bankruptcy.
  • Unlikely that provisioning moves lower next year.
  • Underweight rating on all government-owned banks banks under coverage - SBI, Bank of Baroda, Punjab National Bank, Canara Bank, Bank of India.
  • On a relative basis, private corporate banks are better placed.
  • Good way to get the banks prepared for the new IND-AS accounting standards due to be implemented from April 1, 2018.

Credit Suisse

  • RBI's provisioning policy will make banks more open to taking larger haircuts for bad debt resolution.
  • This move will facilitate entry of new buyers and potential consolidation in the steel sector, in particular.
  • Capital needs will rise, especially for government-owned banks.
  • ICICI Bank is the only corporate lender that would not need dilution despite increased provisions.
  • Estimate Rs 40,000 crore of additional provisions in this financial year.
  • If resolution plans are not agreed to, there could be greater risk to next year’s earnings, and provisions could spike to 100 percent.

The Nifty PSU Bank Index fell as much as 3.6 percent to 3,322, the lowest level in three months.