The Hindu Business Line : Rising bond yields set to hit banks' Q3 profits

Bankers said here that despite the brief respite extended to them by the Reserve Bank of India (RBI) in the last quarter, banks would be still be impacted adversely on their investments. This was because since then and now, the ten-year yield to maturity (YTM) has risen by close to 75 basis points.

In September, banks were allowed to value up to 25 per cent of their demand and time liabilities on a held-to-maturity (HTM) basis. Along with this one-time reprieve, banks were also allowed to reshuffle their portfolios from the held-for-trading and available-for-sale categories to HTM.

With an average investment deposit ratio of about 44 per cent, estimates are that at least Rs 10,000 crore of the profits have been shaved off by the depreciation for the entire industry during the third quarter alone. Bankers said, however, this was based on an YTM of 6.8 per cent.

Bankers said that the large depreciation was expected to impact the pricing of issues of those banks planning to raise tier one capital from the equity markets.

Bankers said that if the RBI had allowed the use of the investment fluctuation reserve (IFR) to provide for depreciation, the impact on profits would be considerably reduced. Larger banks have already reached the IFR norm of five per cent of their gross investments as prescribed by the RBI.

The fear is that ten-year yields could touch 7 per cent during the next few days in view of the rising credit off take and the large scale profit-taking by foreign institutional investor ahead of the year end.

If that happens, bankers fear that the depreciation estimates would go up further.

Signals of the tightening liquidity were evident from shrinking outstanding in the reverse repurchase auctions. The week-end reverse repo outstanding were barely Rs 1,750 crore.

The reverse repos denoted the RBI's liquidity mopping-up operations in the money markets. Instead, the outstanding in the repos has increased to Rs 5,500 crore, implying that more banks were taking recourse to the RBI's window for liquidity support.

Credit off take has largely contributed to the tight liquidity situation in the current quarter. The latest weekly statistical table has reported that non-food credit off take was close to Rs 10,000 crore.

Bankers said that the large scale refinancing of some past foreign currency loans by corporate borrowers was also driving the credit demand. Some of them resorted to refinancing their foreign currency loans with domestic terms loans after the series of hikes of the Fed Funds rate, which has escalated the debt servicing costs.

The current Fed Funds rate at 2.25 per cent has pushed up foreign currency borrowing costs, inclusive for forward cover and swap costs, close to a little over 6 per cent.

Most these borrowers were refinancing foreign currency floating rate loans with domestic fixed rate loans, the bankers said.

More Stories on : Outlook | Debt Market | Financial Performance

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Rupee, bonds in tight range

TCS completes Phase I of Islamic insurance tool project

Laser Soft tool for IndusInd

X'mas bonanza from SBI

Chola MS General in pact with Generali

TMB relaxes loan norms for tractors

Syndicate Bank introduces e-banking facility in Madurai

Exim Bank expects 20% growth in loan assets

Rising bond yields set to hit banks' Q3 profits

UTI Bank board to review splitting of CMD post