The Hindu Business Line : Banks sight treasury gains

AFTER four consecutive quarters of a red lined investment book, banks are finally expected to see profits in treasury operations for the first quarter of the current financial year.

Bankers said that large-scale buying by insurers have contributed largely to the return of profitability in treasury operations. During the current quarter, some of the banks actually booked profits with the yields softening or bond prices rising.

The extent of profitability in treasury operations for banks was evident from the movement of the 7.37 per cent 2014 security. The security was re-issued by the Reserve Bank of India (RBI) on Monday this week. Since the re-issue, the security has appreciated. The security is at present priced at Rs 104 (YTM of 6.77 per cent) as against the reissue price of Rs 103 (YTM of 6.91).

Similarly, in the case of the 10.25 per cent 2021, 16-year tenor paper, the re-issue price was Rs 125.71 (YTM of 7.45 per cent). But Wednesday's closing price was Rs 129 (YTM of 7.19 per cent). Bankers said that this appreciation alone has helped banks, already holding these securities, to rake in large profits.

One of the major factors that has helped the securities markets was the RBI notification last month enlarging the participation of ready forwards. Ready forwards (RF) were extended to include top-level corporates, insurance companies, non-banking finance companies, co-operative banks and mutual funds. The expansion of the RF participation has resulted in improving the liquidity in the markets, and consequently the profitability.

Moreover, bankers said that for the first time in four quarters, they would be spared from providing large depreciation on account of diminution in the value of investments, unlike in the last quarter. They said the trends so far have remained positive since the 10-year yield to maturity (YTM) has come off the high levels of 7.2 per cent touched during this quarter and settled close to 6.9 levels. During the whole of the last financial year, depreciation and contraction in treasury income had shaved off bank profits.

Yet, despite the improved liquidity, few banks were interested in reversing the de-risking trend of their investment books. Most of the banks have already shrunk the maturity of their investment books to under 3 per cent. The private sector banks, especially the new ones , have brought this to just one year. Bankers said that life insurers' interest had helped them to accelerate de-risking efforts.

They said that the immediate aversion for long-term securities stemmed from the high investment-deposit ratios. Investment-deposit ratios or specifically government securities investment-deposit ratios of banks are currently about 44 per cent, more than the prescribed statutory liquidity ratio of 25 per cent. Consequently, bankers said that there was little reason for them to push for investments immediately unless there was big increase in deposit accretions or credit offtake slowed down substantially.

At present, neither of these trends has taken place and non-food credit off-take has, in fact, picked up since the beginning of this fiscal year growing 20 per cent.

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