JP Morgan downgrades Bank of India to 'underweight'

MUMBAI: Foreign brokerage JP Morgan cut its price target for PSU banks by 10% and downgraded Bank Of India to "Underweight" as wage inflation and mortality assumptions raise the risk of future provisions. The note added that while there will be no immediate earnings impact recurring pension provisions and optimistic accounting remain a capital risk for public sector banks.

"We think the current assumptions ignore the impact of the bi-decadal wage increases from collective bargaining, probably because it’s not a certainty" said Seshadri Sen, Research Analyst, JP Morgan. The agreement with the unions expires in Sep 2012, and another lumpy provision is likely in FY14, he added PSU banks and unions renegotiate wages every five years – wages expanded by 18% during the previous settlement for 2007-12.

The report also says, with non-pension benefits (post-retiral medical, for one) adding to the pressures, the recent pension changes have blunted the cost efficiencies of PSU banks. "We estimate pension liabilities to expand at 20% against the discount unwind of 8%, with the risk of periodic capital shocks."

The provisions will be uneven, and we estimate that obligations will have to rise by 20% per annum for the next five years to adjust to realistic assumptions, it added.