Morgan Stanley estimates credit loss impact on loans between 1% and 2.5%

Morgan Stanley expressed difficulty in providing an exact estimation of the impact of the expected credit loss (ECL) guidelines, as the final guidelines are pending. However, their rough estimate suggests that the impact could range from 1% to 2.5% of loans.

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Morgan Stanley expressed difficulty in providing an exact estimation of the impact of the expected credit loss (ECL) guidelines, as the final guidelines are pending. However, their rough estimate suggests that the impact could range from 1 percent to 2.5 percent of loans.  Additionally, they suggest that the potential impact on the net worth of these banks could range from 5 percent to 20 percent.

“Banks have been doing pro forma calculations based on certain assumptions. Some banks have disclosed their potential impact at 4-5 percent of loans, which includes non-ECL-related capital requirements for Ind-AS as well (which is not in the pipeline as of now). On ECL provisioning deficit, it’s tough to estimate the exact impact pending final guidelines”, Morgan Stanley said in its recent report.

The brokerage firm has adopted a more discerning approach towards state-run banks and downgraded Punjab National Bank (PNB) to an underweight rating from equal weight. It favors Bank of Baroda (BOB), Bank of India (BOI), and State Bank of India (SBI) due to their stronger balance sheets when compared to Canara Bank and PNB.

In January 2023, the Reserve Bank of India (RBI) initiated the process of gathering feedback on the ECL-based loss provisioning model by issuing a discussion paper. This paper was aimed at collecting inputs from all stakeholders involved. It is anticipated that the final guidelines for the ECL model will be notified by the financial year 2023-2024, with the implementation scheduled to begin on April 1, 2025.

The brokerage firm says BOI has weak asset quality but better capital and coverage, BOB stands out with good capital, coverage, and a superior asset quality track record. SBI, despite lower capital, showcases better coverage and asset quality, aided by a higher proportion of retail loans.

PSU Banks were under pressure post this report. PNB fell 4 percent, Indian Bank lost 3.5 percent, Union Bank of India declined 2.6 percent, Central Bank of India fell 2.4 percent, Indian Overseas Bank down 2.2 percent, Bank of India, Bank of Maharashtra and Canara Bank lost 2 percent each while SBI and Bank of Baroda lost 1 percent each.