Feb 26, 2013, 04.43 PM IST | Source: Moneycontrol.com

P Lilladher picks 7 stocks from banking universe

Prabhudas Lilladher has come out with its report on bank sector. According to the research firm, Punjab National Bank (PNB) / Union Bank of India seems better covered on pensions v/s Bank Of Baroda (BOB) / Bank Of India (BOI) with SBI midway.

Prabhudas Lilladher has come out with its report on bank sector. According to the research firm, Punjab National Bank (PNB) / Union Bank of India seems better covered on pensions v/s Bank Of Baroda (BOB) / Bank Of India (BOI) with SBI midway and among mid/small caps, Central Bank of India / Allahabad Bank seem better.

"Our feedback from PSU banks/RBI indicates that the long awaited norms on standardisation of pension assumptions will be out shortly. Discount rate/plan returns assumptions will be a relatively easy fix for RBI and outliers here will be impacted in the near term (banks with aggressive assumptions) and we estimate ~5-12% increase in pension obligations on this account. Wage inflation/mortality assumption shortfalls are high given WEAK assumptions (30-40% higher pension obligations) but we estimate current quantum of P&L provisioning will cover majority of the shortfall in 5-8 yrs at current run rate. Among our coverage, PNB/Union seems better covered on pensions v/s BOB/BOI with SBI midway. Among mid/small caps, Central/Allahabad banks seem better covered v/s others.

4 key Pension Assumptions and Sensitivity: (1) Discount rate Range is 8-9%, increased by 50-100bps over FY10-12 Every 50bps lower discount rate increases pensions by ~4% (2) Return Assumption Range is 8-9.1%, increased by 0-50bps over FY10-12 50bps lower return increases pension by ~3.5%. (3) Wage inflation Range is 3-6% and we believe realistic level should be +8% - Every 1% higher inflation could increase obligation by 5% (4) Mortality rates Every 2 yrs higher life expectancy increases obligation by 4.5%.

Easier part - Discount rate and plan return - To impact banks with aggressive assumptions: Discount rates and plan return can be relatively easily benchmarked to long term G-Secs with a spread. Some PSU banks have been aggressive and have increased their discount rate/return rates over last 2-3 yrs to 8.5-9.0% and with current 20 yr G-Sec yields at ~8-8.2%, these banks could be impacted. Among large caps, SBI is the most aggressive followed by PNB/BOI on these assumptions. IDBI/Corporation/Uco among mid caps are most aggressive. We estimate~5-12% higher pension obligations on this account.

The Tricky part - Wage inflation and mortality assumption - Shortfall high: Large part of the pension shortfall is due to wage inflation and mortality assumptions (~85% of the shortfall 30-40% higher obligation). Life expectancy has moved up by 3-5yrs over last decade and shortfall on this account could be ~15-20% of current pension obligations. Wage inflation assumption at ~3-5% is relatively weak considering 3% annual inflation relating to bipartite settlement only. Our sample pension estimator (for PNB) indicates a ~42% shortfall in pensions and using similar assumptions we see a 40-50% shortfall for all PSUs.

But high P&L provisioning to save the day: Though we estimate pension shortfall at 35%-50% (10%-20% net worth), last 2-3 yrs have seen a 2-3x jump in additional P&L provisioning and this we believe will cushion majority of the pension shortfall. Our pension shortfall estimates translates into Rs0.7-0.8mn shortfall per pension optee (Rs2.0-2.2mn realistic v/s Rs1.3-1.4mn existing obligation) and annual P&L provisions amounting to Rs0.12-0.20mn per optee/yr provides comfort. Among our coverage, PNB/Union seems better covered on pensions v/s BOB/BOI with SBI midway. Among mid/small caps, Central/Allahabad banks seem better covered v/s others covered," says Prabhudas Lilladher research report.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click here

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