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SBP unveils regulatory support – initial impressions

SBP unveils regulatory support – initial impressions

SBP unveils interim measures to support bank sector

State Bank of Pakistan (SBP) finally unveiled the much speculated relaxation in provisioning requirements on 20th Oct. While EPS accretive in the immediate future, from our vantage point, the move is a temporary step back in risk management and reduces short term earnings visibility to some extent.

Relaxation # 1 – Benefit of FSV increased

Benefit of Forced Sale Value (FSV) of collateral while calculating provisions has been increased from 30% to 40% of pledged assets including industrial property and land, earlier excluded. The new regulation is applicable on NPLs for 3 yrs from the date of classification. Crude calculations indicate EPS impact of ~3%-5% for our cluster over 2009-11E.

Relaxation # 2- Restructured loans to be upgraded

” Banks are now allowed to upgrade NPLs by one category upon restructuring/ rescheduling of an overdue loan. Moreover, on fully meeting the terms and conditions of rescheduling/restructuring for a continuous period of 1 year and post cash recovery of at least 5% of the rescheduled/restructured amount, loan classification may be further upgraded by one category.

” Provisioning requirement would correspond to upgraded category in addition to 50% of the difference between required provisioning on upgraded category and the previous category. A doubtful loan upgraded to substandard would require provisioning of 37.5% = 50% + (50% of 25% differential).

” The benefit thus received would be adjusted directly to equity – not to be routed through P&L- and gains will not be available for dividend distribution. Hence the benefit will primarily accrue via a higher book value and an enhanced CAR. For eg restructuring of a PRs5bn doubtful loan will add pre tax PRs625mn to equity upon restructuring and another PRs1.25bn upon completion of a year.

” This interim restructuring requirement is applicable on existing classified loans (NPLs) that are overdue by less than 1 year only.

” The regulation is applicable from Jan-09 and till June 30, 2010. Thereafter prevailing instructions on the subject will be applicable.

 

All banks might not avail the benefit

Pertinent to note is that these are time specific relaxations, providing interim relief to smaller banks facing capital constraints or banks with exposure to couple of high profile defaults over the last few months. Previous instance of relaxation in FSV indicates that some of the larger banks (similar to MCB, HBL and ABL in 2008) might not avail this interim benefit in interest of long term earnings stability.

 

KASB Securities and Economics Research

Bank of America Merrill Lynch



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