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MOSL: FINANCIALS-NPL ageing analysis – the final countdown!

Financials: NPL ageing analysis – the final countdown!

 

Gross NPLs of the banking industry have spiked further in FY18, particularly as balance sheet cleansing continues. Revocation of all asset quality dispensation schemes (SDR, S4A, 5:25, etc.) has further accelerated the recognition of stressed loans and credit cost has thus risen sharply for all corporate banks. Most PSU banks have reported huge losses (aggregate losses of INR853.7b for PSU banks in FY18) though have guided for moderation in bad loan formation, as the quantum of stressed loans (watch list + SMA-2) has moderated significantly. Yet, credit cost is expected to stay elevated, as banks make provisions towards ageing of NPLs and we estimate this to drive average 800bp improvement in PCR of underlying corporate banks (range of 54% to 63%).

 We note that banks will still need to follow existing guidelines on provisioning in FY19 before they migrate to IND-AS from FY20, which will entail a change in provisioning methodology. In this note, we have deep dived into the provisioning requirement of large PSU and Private Banks and have done bottom-up analysis to assess the potential trajectory in credit cost. We estimate that NPL ageing related provisions will alone account for 13-70% of FY19E operating profit, leaving limited room for any meaningful earnings recovery. PNB, BOI and UNBK are the most vulnerable, as we estimate their credit cost to be most sticky while AXSB, ICICIBC and SBIN are relatively better placed and should report a faster earnings recovery.