RBI's June 7 circular on stressed assets may keep banks' provisions high

With the June quarter earnings season getting underway next week, hopes are high from the banking sector, which has until now given the maximum impetus to earnings growth. While the sector may continue to perform well, provisioning is worrying investors. From a high base of FY18 and FY19, FY20 is expected to be incrementally better. 

However, concerns arise after the revised circular on the treatment of stressed assets issued on June 7, 2019, by the Reserve Bank of India (RBI). While the new norms aren’t as exacting as the February 12 circular, it puts the onus on banks to kick-start resolution in cases of stress. According to the revised guidelines, banks need to review the borrower account within 30 days of default to decide on the resolution strategy and implement the same within 210 days of the default, failing which banks could be subject to additional provisioning. While provisioning costs due to the latter aspect may take time to show up, in the immediate term, recognition of stress in itself may result in higher provisioning. Over the past three months, accounts such as Dewan Housing, Reliance group firms, Essel group companies and smaller names such as Sadbhav Infrastructure and Sintex have turned into troubled names for the banking industry. 

Under these circumstances, analysts doubt if there can be a material reduction in provisioning costs, especially in the June quarter. Analysts at Kotak Institutional Equities say the impact of the new guidelines will be felt the most in the next cycle of non-performing assets (NPA) or the fresh set of assets turning problematic. To that extent, they said a decline in NPA ratios could slowdown, as banks could look for resolution that aims to improve recovery rates. ‘

An analyst at a domestic brokerage added with fresh pain brewing in the system, it could challenge the Street’s expectation from the sector. “At present, the view is that provisioning costs should reduce by at least 40-50 per cent from the March-quarter peak,” he said. If the scenario doesn’t play out as anticipated, it could be a major sentiment dampener. “Some banking stocks could then see steep correction, given the expensive valuations they command,” the analyst added. Therefore, till clarity emerges on this aspect, analysts believe it may not be prudent to take fresh exposure to banking stocks earnings estimates. Given the current levels, improving deal pipeline, and contract sizes, most analysts believe the stock is available at attractive valuations.