Banks with lower provisioning face earnings downgrade

28 Oct 2009, ET Bureau

MUMBAI: The Reserve Bank of India’s advice to banks to augment their provisioning for the non-performing assets is expected to dent the performance of banks with low provision coverage ratio. Brokerages are considering earnings downgrades for such stocks as profitability could be impacted on account of this.

According to the Reserve Bank of India, banks must keep at least 70% provision coverage ratio, including floating provisions. Banks should achieve this norm by end of September 2010.

“The RBI's monetary policy has indicated a phased exit from the stimulus measures. This also included measures to strengthen the banking system by way of increased NPA coverage of 70% and higher provisioning for lending to builders. This could in the short term have a negative bearing on banks' profitability and hence selling pressure on banks was significant since Tuesday. Those banks with lower provisioning like - SBI, ICICI & Canara Bank will suffer more as they need to provide more in next four quarters to meet the deadline for higher NPA coverage,” said DD Sharma, senior vice president-retail at Anand Rathi Securities.

On the other hand, those with already higher coverage like Punjab National Bank or Bank of Baroda may not be affected. Similarly pressure is being seen on reality stocks as cost of funding for reality will go up due to restoration of higher risk provisioning from 0.4 per cent to 1 per cent. The RBI also reinstated the SLR to 25 per cent from 24 per cent in an effort to phase out the special liquidity support measures for banks. Banks' investment book would have to be marked-to-market. This is again a potential negative for banks.

“We conclude that this move will impact the performance of banks which have lower coverage including SBI (currently at 45%), Canara Bank (28%), and ICICI Bank (52%) based on the latest reported figures. However, financial institutions including Axis Bank, HDFC Bank, and Federal Bank have a provision coverage ratio of more than 70%. Therefore, banks with higher coverage ratio will not be impacted by the increase in provision coverage ratio,” said Nirmal Bang Securities.

The brokerage firm has recommended investors to sell shares of State Bank of India on every rise with a stop-loss of 2270, with a near term target looks 2125-2085. The stock would show positive strength only if it maintains above 2340.

Echoing similar views, Sharekhan’s research firm is advising investors to shift from banks with low provision coverage to those with higher coverage ratio. “Banks with considerably low provision coverage ratio (lower than 50%) such as State Bank of India, ICICI Bank and IDBI Bank will have to make higher provisions for NPAs. This will impact their profitability and result in earnings downgrades by the street. Thus, we advise shifting out of these banks to large banks with good provision coverage ratio, such as Bank of Baroda, Punjab National Bank and Union Bank of India. We are also removing IDBI Bank from our top picks list with immediate effect.”