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.
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