Relaxing FSV will boost banking valuations

There are talks in the banking sector about the possible relaxation of Forced Sale Value benefits for commercial banks for the provisioning against non-performing loans. So, here is a simple analysis based on certain set of assumptions to assess the impact of FSV relaxation on earnings for nine listed banks.
In January this year, the central bank allowed banks to deduct 30 percent of FSV on pledged stocks, residential and commercial properties on corporate and SMEs advances, while keeping industrial land and property out of the relaxation. Now, there is noise in the market that on account of poor performance of banks, SBP might give similar relaxation for industrial land and property.
Although, FSV benefit would not directly increase the balance sheet quality of banks, better earnings will, by raising their equity and capital adequacy ratio -- hence, giving more room to lenders to leverage their capital and other funding. This, in turn, can improve the valuation of banks using different techniques including price and book multiples and adjusted book value. The analysis reveals that the impact of relaxation of FSV benefit on industrial land and property is significant and varies for different banks.
The impact could have been even higher had it not been for our rather conservative assumptions: the FSV of collateral is assumed to be equal to the amount of loans, whereas in most cases it is higher than the loan value - that the FSV benefit will be only on corporate segment as most of SMEs collateral is commercial property and lastly only 50 percent of collateral is assumed as industrial land and property within the corporate sector.

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             EPS 1     INCREASE IN EPS     ANNUALIZED

        HCY09 (RS) AFTER FSV BENEFIT (RS.)     IMPACT

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ABL           4.30                1.81            21%

AKBL          1.15                1.60            69%

BAFL          0.94                0.72            38%

FABL          0.35                1.12           161%

HBL           7.20                3.94            27%

MCB          11.22                2.52            11%

NBP           5.84                1.36            12%

NIB            N/A                1.14            N/A

UBL           5.03                2.67            27%

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Source: Latest company reports, SBP & BR Research
ASSUMPTIONS: Relaxation of FSV by 30% on industrial land and property is on all corporate loans Only corporate loans are considered for the exercise based on industry average of 63% (as of Mar 09). Only 50% of collateral is industrial and the rest as residential, commercial and pledged shares. Normal tax (35%) is applied on reversal of NPLs provisioning. FSV is equal to the loan amount.