We believe it is extremely desirable that the bank contours the stress and provides forward guidance. This provides a reasonable upper bound to stress levels, as current stress assumptions for the street, including ours, are based on theoretical exercises. However, the bar for disclosure has been set higher by Axis Bank’s. It needs a superior balancing act from the management to improve disclosures without causing investor concerns.
We have assumed slippages of ~Rs 245bn for the next 5 quarters up to FY17 in our model. Assuming a similar slippage ratio of 60% – borrowing from Axis Bank (AXSB IN, 468.05, BUY) – we are looking at a watch-list size of ~Rs 400bn.
Actual slippages in Q3 were Rs66bn (~Rs44bn coming from the RBI asset quality review). Management guided for a similar number in Q4. We have penciled in Rs69.4bn in Q4, although we would be extremely happy should the management decide to undertake additional prudential recognition. The bulk of stress emanates from the FY10-12 sanctions, as highlighted earlier at Axis Bank.
The pipeline for 5/25 refinancing and SDR was Rs7bn and Rs12bn, respectively, at the end of Q3.
However, if the management comes clean on a “watch-list”, these numbers would get subsumed within that group.
The management had indicated front-loading of fresh restructuring in the first half of current fiscal (guided to remain below FY15 levels of Rs 54.6bn), with Q1-Q3FY16 restructuring being Rs 19.6bn, Rs 1.95bn and Rs 5.84bn.
We model credit costs for the quarter at ~320bps (annualized), and for the full year at ~195bps.