An analysis of 22 PSB earnings for the first nine months of current fiscal shows the employee benefit-related provisioning costs stood at R9,357 crore, constituting 17.37% of total employee costs and affected bank operating profits by 9.70%.
While PSBs in the first nine months have charged additional R4,250 crore to income statement towards amortisation related to enhancement in gratuity limit and re-opening of pension option for existing employees (in line with RBIs February 9, 2011, circular); some banks like SBI have made provision of R1,800 crore towards additional pension liability. PSBs have also made additional provision of nearly R3,300 crore in the nine-month period on ad-hoc basis for wage revision effective November 2012.
These banks have unamortised pension liability of R5,250 crore, likely to be fully amortised by most of them in next five quarters.
Analysts maintain many PSBs like Bank of India, Canara Bank, PNB and Indian Overseas Bank have not fully started providing for higher pension liability due to change in mortality table assumptions separately.
Also many banks like Central Bank, Bank of India, Indian Bank, Corporation Bank and Indian Overseas Bank are provisioning the 10thbipartite wage hike as these banks had assumed 10% wage hike unlike 15% by SBI and PNB.
SBI that has seen 34.90% increase in employee costs in these nine months due to R3,500 crore provisions towards additional employee expenses expects further R600 crore of one-time charges in the fourth quarter towards pension liability. To an extent, R2,400 crore (of pension provisioning) should be sufficient, said Arundhati Bhattacharya, SBI chairman at the quarterly earnings analyst call on February 17.
Aditya Narain, MD & India equity strategist at Citigroup Global Markets, in his banking result review for December quarter wrote while private banks are cyclically offsetting revenue slowdown through costs; PSUs are counter-cyclically (or out of control) offsetting revenue ups with high costs.
While it is difficult to predict the peak in pensions, we believe this is likely to take long and typically happens with the lag of a generation. Moreover, pensions in defined benefit schemes will keep increasing with pay and promotions and so pension costs are likely to keep rising in medium term, wrote Manish Chowdhary and Sameer Bhise, analysts at IDFC Institutional Equities in their report in February.