The State Bank of Pakistan through a circular finally confirmed market rumors regarding regulatory relaxation for provisioning requirements against Forced Sale Value (FSV) for commercial banks. According to the notice, the regulator has increased the FSV benefit for calculating NPL provisions from existing 30% to 40% on all collateral classes against NPLs for three years from the date of classification w.e.f. September 30, 2009. Earlier only pledged stocks and mortgaged properties were eligible while industrial assets were excluded. Further, for the consumer financing portfolio of banks the benefit has been raised to 50%. This will obviously provide greater provisioning relief to banks such as UBL and BAFL who have a bigger consumer financing segment.
The accurate impact on earnings is difficult to estimate as benefit through FSV is calculated against value of collateral for Non-Performing Loans (NPL). However, in our In Focus released on October 16, 2009 we estimated EPS impact for large 5 banks based on CY07 numbers.
Banks allowed to take advantage of Loan Restructuring
Another favorable aspect of the amendment in prudential regulations deals with the treatment of rescheduled/restructured loans. Prior to the amendment, banks were not allowed to change the status of rescheduled NPLs unless the conditions of rescheduling were met for at least one year along with recovery of at least 10% of the outstanding amount in cash. Now, however, a rescheduled loan classified as doubtful may be upgraded to substandard category at the time of rescheduling. For substandard loans the up gradation to regular status may be done after meeting the terms and conditions of rescheduling for a period of one year and at least 5% cash recovery of the outstanding amount. Also, provisioning against these NPLs will be done by taking 50% of the difference between the amount of provision required in the category after up gradation and the former category. As of now, it is difficult to estimate the accurate impact on banks as we do not have the information on the amount of loans that have been restructured by individual commercial banks. However, banks that opt to take advantage of this amendment can effectively shore up their balance sheets and book values as some restructured loans might be brought back to regular status. This of course depends on the fact that the bank has engaged in restructuring of advances and complied with the required terms and conditions.
Summing up, the amendments to the Prudential Regulations are positive for the banking sector and their impact will be visible on 4QCY09 earnings for banks that opt to take advantage of the change in regulation. We maintain our Marketweight stance on the sector.
