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					                                                                           Banks 
                                                                           RBI's Basel III guidelines more stringent: Some pressure on PSUs

January 02, 2012                                                           RBI came up with draft Basel‐3 guidelines to be implemented over FY13‐17. RBI's 
                                                                           Basel‐3  guidelines  are  more  stringent  that  the  actual  guidelines  as  it  requires 
Adarsh Parasrampuria                                                       higher  core  equity  capital/Tier‐1  and  the  implementation  is  more  front  ended. 




                                                                                                                                                                                                Sector Update 
adarshparasrampuria@plindia.com
+91-22-66322236
                                                                           Impact on Private banks is negligible and though PSU banks are comfortable in the 
                                                                           near  term,  increase  in  core  equity  requirements  would  pressure  PSU  banks 
Parul Gulati                                                               especially those with higher reliance on perpetual debt/preference tier‐1 capital. 
parulgulati@plindia.com
+91-22-66322242
                                                                                Key  Capital  requirements:  (1) Increase in minimum core equity and tier-1
Sensex v/s BSE Bankex 
                                                                                requirement to 5.5% and 7% by FY15 (2) Share of innovative debt/pref
                                                                                instruments restricted to 1.5% of RWA v/s 40% of Tier-1 capital currently (3)
                    BSE Bankex                          Sensex                  Introduction of capital conversation buffer (CCB) of 2.5% from FY14-17, taking
 105
 100                                                                            total core equity and tier-1 requirement post CCB to 8% and 9.5% respectively.
  95
  90                                                                            Other  recommendations:  Equity in subsidiaries and other equity investments
  85
  80                                                                            which was earlier deducted 50% from tier-1 and 50% from Tier-2 capital would
  75                                                                            now carry a risk weight of 100-250% for investments upto ~10% of bank's
  70
  65                                                                            capital exceeding which deduction would be made 100% from core tier-1 capital
                                                                                of the bank. Also, RBI has recommended many deductions from core equity
                                    Jul-11
                 Feb-11




                                                      Sep-11
        Jan-11




                                                               Dec-11
                                   Jun-11

                                             Aug-11
                          May-11




                                                      Oct-11
                                                               Nov-11
                          Apr-11
                 Mar-11




                                                                                capital v/s tier-1 capital earlier.

Source: Bloomberg                                                               Impact on PSU banks: The increase in capital requirements would impact PSUs.
                                                                                Though most PSUs would comply by FY13 requirements, we believe many would
                                                                                find it difficult to meet FY15-17 requirements especially on core-equity capital
                                                                                requirements of 6.75-8.0% by FY15-17. Data suggests only 7-8 PSU banks
                                                                                comply with recommended core equity levels currently. Most PSUs meet
                                                                                current requirements (FY13) but 6-7 PSUs do not meet even FY15 requirements
                                                                                given higher reliance on perpetual instruments (10-40%) (Please see Exhibit 5).

                                                                                Impact  on  Private  banks: Given negligible reliance on perpetual instruments,
Stock Performance                                                               private banks are very well placed to meet the requirements. Stringent norms
(%)                  1M                          6M                12M          for capital deductions will have some impact on reported capital levels for ICICI
Sensex              (8.3)                      (17.6)            (24.6)         bank (given large proportion of investment in subsidiaries) but our estimates
BSE Bankex        (13.2)                       (28.8)            (31.6)         show that the impact on tier-1 for ICICI is manageable.

Axis Bank                    (19.7)             (38.3)           (40.1)    Exhibit 1: RBI’s recommendations more stringent that Basel‐III guidelines 
Bank of Baroda                (9.0)             (23.6)           (25.8)                                                        Existing                  Basel‐3                       RBI
Bank of India                (21.8)             (35.7)           (41.0)    Excluding capital buffer 
HDFC                          (2.3)              (7.3)           (10.5)
                                                                           Minimum core Equity capital                            3.60%                    4.50%                   5.50%
HDFC Bank                     (8.4)             (14.7)            (9.0)
                                                                           Minimum Tier-1 capital                                 6.00%                    6.00%                   7.00%
ICICI Bank                   (13.1)             (37.5)           (40.2)
                                                                           Total Capital Requirement                              9.00%                    8.00%                   9.00%
IDFC                         (20.6)             (32.1)           (49.8)
IndusInd Bank                (17.8)             (17.9)           (14.7)    Including capital buffer 
Kotak Mahindra               (13.2)              (9.1)            (5.1)    Minimum core Equity capital                            3.60%                    7.00%                   8.00%
PNB                          (14.8)             (28.5)           (36.1)    Minimum Tier-1 capital                                 6.00%                    8.50%                   9.50%
SBI                          (14.2)             (33.1)           (42.4)    Total Capital Requirement                              9.00%                  10.50%                   11.50%
YES Bank                     (17.7)             (25.0)           (23.7)
                                                                           Source: RBI, PL Research 

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                                                                                                                                                                                                                                   Banks



Exhibit 2:   RBI's recommendations more stringent that actual Basel‐III recommendations 
                                                                                                                                                           Recommendations 
                                            Existing          Basel‐3                                RBI
                                                                                                                            FY13                  FY14                       FY15                       FY16                         FY17
Excluding capital buffer 
Minimum core Equity capital                   3.60%            4.50%                           5.50%                       4.50%                 5.00%                       5.50%                     5.50%                        5.50%
Minimum Tier-1 capital                        6.00%            6.00%                           7.00%                       6.00%                 6.50%                       7.00%                     7.00%                        7.00%
Total Capital Requirement                     9.00%            8.00%                           9.00%                       8.00%                 8.50%                       9.00%                     9.00%                        9.00%
Capital conservation buffer (CCB)             0.00%            2.50%                           2.50%                       0.00%                 0.63%                       1.25%                     1.88%                        2.50%


Including capital buffer 
Minimum core Equity capital                   3.60%            7.00%                           8.00%                       4.50%                 5.63%                       6.75%                     7.38%                        8.00%
Minimum Tier-1 capital                        6.00%            8.50%                           9.50%                       6.00%                 7.13%                       8.25%                     8.88%                        9.50%
Total Capital Requirement                     9.00%           10.50%                     11.50%                            8.00%                 9.13%                   10.25%                       10.88%                       11.50%

Source: PL Research 

                                                  Exhibit 3: Changes in deduction from Capital 
                                                                                                                            Existing norms                                     Recommended/ Basel‐3 
                                                  Goodwill and Intangibles                                                 From Tier-1 capital                                 From core Equity capital
                                                  Deferred tax asset                                                       From Tier-1 capital                                      From Tier-1 capital
                                                  Shortfall in NPA provisions
                                                                                                                                       Nil                                     From core Equity capital
                                                  (under IRB)
                                                                                                                                                                        250% risk weight till 10% of bank
                                                  Equity investments (>30%
                                                                                                                      50% tier-1, 50% tier-2                           capital, 100% tier-1 deduction post
                                                  stake)
                                                                                                                                                                                       that
                                                                                                                                                                        250% risk weight till 10% of bank
                                                  Equity investments (>10%
                                                                                                                      50% tier-1, 50% tier-2                           capital, 100% tier-1 deduction post
                                                  stake)
                                                                                                                                                                                       that
                                                                                                                                                                        100% risk weight till 10% of bank
                                                  Other investments (<10%
                                                                                                                                                                          capital, 100% corresponding
                                                  stake)
                                                                                                                                                                                deduction post that
                                                  Source: PL Research 

                                                  Exhibit 4: Some PSU banks have high tier‐1 reliance on perpetual instruments 

                                                        40%
                                                        35%
                                                        30%
                                                        25%
                                                        20%
                                                        15%
                                                        10%
                                                         5%
                                                         0%
                                                                                                Punjab and …
                                                                                                               SBI




                                                                                                                                                                                                BOI
                                                                                      Indian




                                                                                                                                                                             IDBI
                                                                                                                                     BOB




                                                                                                                                                                                                                Vijaya
                                                                          Allahabad




                                                                                                                     OBC




                                                                                                                                                                                                                                    Uco
                                                                                                                                                                                                       United
                                                                                                                                           IOB
                                                                                                                            Canara




                                                                                                                                                               Union




                                                                                                                                                                                    Syndicate
                                                                                                                                                                       PNB




                                                                                                                                                                                                                         Central
                                                                 Andhra




                                                                                                                                                 Corporation




                                                  Source: PL Research 




January 02, 2012                                                                                                                                                                                                                          2
                                                                                                       Banks



                   Exhibit 5: Core capital levels low for some PSU banks (as of March’11) 
                                                                                      Perpetual 
                                         Core Equity                                              Compliance 
                                                        Tier‐1 Equity  Total CAR  instruments 
                                              Capital                                              to Basel‐III
                                                                                    (% of Tier‐1)
                   Central                       5.0%           6.3%        13.1%            30%         FY13
                   IDBI                         6.2%          8.1%         13.8%            10%          FY14
                   Vijaya                       6.7%          9.2%         12.6%            27%          FY14
                   Uco                          7.0%          8.6%         13.8%            42%          FY15
                   United                       7.3%          8.9%         13.1%            18%          FY15
                   SBI                          7.3%          7.8%         12.0%             7%          FY14
                   BOI                          7.4%          8.3%         12.2%            12%          FY15
                   IOB                          7.4%          8.2%         14.6%             9%          FY14
                   Corporation                  7.9%          8.7%         14.1%             9%          FY15
                   Union                        7.9%          8.7%         13.0%             9%          FY15
                   Punjab and Sind              7.9%          8.4%         12.9%             5%          FY15
                   PNB                          8.0%          8.8%         13.0%            10%          FY16
                   Allahabad                    8.2%          8.6%         13.0%             4%          FY15
                   Syndicate                    8.3%          9.3%         13.0%            10%          FY16
                   BOB                          9.1%         10.0%         14.5%             9%          FY17
                   Andhra                       9.4%          9.7%         14.4%             3%          FY17
                   Canara                      10.0%         10.9%         15.4%             8%          FY17
                   OBC                         10.3%         11.2%         14.2%             8%          FY17
                   Indian                      10.7%         11.2%         13.7%             5%          FY17

                   Source: PL Research 




January 02, 2012                                                                                            3
                                                                                                                                                                            Banks




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 Rating Distribution of Research Coverage                                                  

                        70%
                                               59.4%
                        60%
  % of Total Coverage




                        50%
                        40%
                        30%
                              18.1%                            20.3%
                        20%
                        10%                                                    2.2%
                        0%
                               Buy         Accumulate          Reduce          Sell

 PL’s Recommendation Nomenclature                                                      

 BUY                           :     Over 15% Outperformance to Sensex over 12-months         Accumulate           :   Outperformance to Sensex over 12-months

 Reduce                        :     Underperformance to Sensex over 12-months                Sell                 :   Over 15% underperformance to Sensex over 12-months

 Trading Buy                   :     Over 10% absolute upside in 1-month                      Trading Sell         :   Over 10% absolute decline in 1-month

 Not Rated (NR)                :     No specific call on the stock                            Under Review (UR)    :   Rating likely to change shortly 

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January 02, 2012                                                                                                                                                                4

				
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