PSU banks shares slip on concerns over RBI’s ECL norms; Nifty PSU top laggard

Other state-run lenders such as Union Bank of India, Central Bank of India, Punjab & Sind Bank, Indian Overseas Bank and UCO Bank plunged over 1-2% each during the day.

After rallying over 12% in April, the Nifty PSU Bank index has again come under pressure this month. The index was the top loser in the market today. Nifty PSU Bank has slumped more than 8% YTD, underperforming the benchmark Nifty index.

Key concern dragging PSU stocks since the beginning of the year is the Reserve Bank of India’s (RBI) proposed Expected Credit Loss (ECL) framework for provisioning by banks.

“The PSU banks are factoring additional provisions requirements due to the ECL norms. These norms are likely to have a greater impact on the state-run lenders. However, more clarity on the regulation is awaited,” said an analyst.

Meanwhile, Morgan Stanley roughly estimates the potential impact of ECL guidelines in the range of 1% to 2.5% of loans. It suggests the potential impact on the net worth of these banks could be 5-20%.

“Banks have been doing pro forma calculations based on certain assumptions. Some banks have disclosed their potential impact at 4-5% of loans, which includes non-ECL-related capital requirements for Ind-AS as well (which is not in the pipeline as of now). On ECL provisioning deficit, it’s tough to estimate the exact impact pending final guidelines,” the foreign brokerage said in a note.

Morgan Stanley expects greater impact on Canara Bank and Punjab National Bank, and favours Bank of Baroda, State Bank of India (SBI) and Bank of India because of their stronger balance sheets. It also moved to Underweight on PNB after last year’s outperformance.

The central bank had issued a discussion paper in January which proposes to bring banks’ provisioning requirements on par with those for NBFCs. It proposed that the requirement for estimating impairment losses under the expected credit loss approach would apply to all loans and advances.

The norms capture the probability of default (PD) and the loss given default (LGD) at an earlier stage, looking at historical individual experiences as against the present norm of building provisions after a default occurs.

“The PSU banks have sharply outperformed in the last one year. Hence, the recent fall in banking shares can also be attributed to a short-term sectoral rotation by investors,” said Kunj Bansal, NISM.