Kotak says pension costs to be 10% of PSU banks’ net-worth  

November 24, 2010

Kotak believes that the impact of pension costs is likely to be about 10% of banks’ net-worth and is likely to be provided through the P&L over the next 5 years; high RoA/RoEs are sufficient to absorb the extra cost

In a report released to its clients yesterday, Kotak Institutional Equities Research said that the underlying liability for pension for banks is likely to be about 10% of their FY12 book but will probably be provided through P&L over five years. It believes that every employee is likely to generate a pension liability of approximately Rs1.4 million against earlier estimates of Rs1.1 million.

Indian Bank has the lowest liability at just 7% of net-worth, followed by SBI at 9.6%, and BoB, OBC, and PNB between 10% and 11%. UCO, United Bank, Central Bank of India and Vijaya Bank's liabilities are above 20% of net-worth.



The report points out that in many cases, data is diverging from the banks' existing estimates. "We see discrepancies in the data reported by banks on their estimated shortfall despite them assuming close to full conversion of employees to pension option."

According to Kotak, the highest growth in staff expenses is expected to be for BoI and BoB while the lowest is IOB and Union Bank.



Kotak said in its report that while it maintains its positive outlook on public sector banks, near-term headwinds exist. "On a structural basis, we are comfortable that public sector banks will deliver higher RoEs of about 20%, with select banks well over 20%." It believes that the recent announcement of capital infusion largely in the form of preference shares will result in structurally higher RoEs. However, it says that uncertainty will prevail until the final pension liability is announced along with any amortising benefit.

In the current form, banks and employees contribute equally during the service period of the employee and in return he/she gets a set pension after retirement. However, most PSU banks had not provided for higher gratuity. In the last budget, the Gratuity Act was amended and employees can now get up to Rs1 million on retirement against the Rs300,000 cap earlier.

About a couple of days ago, SBI employees had planned to go on a strike to demand that their pension be brought on par with that of nationalised banks. The strike was called off when the government agreed to their demands. While about 170,000 employees, including 60,000 officers, would benefit with a higher pension retrospectively from 1st November of 2007, this is expected to strain SBI's balance sheet.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).— Munira Dongre