The Hindu Business Line : Banks shift gear, move to long-dated securities

Why the change
To improve average yield on investments.
To offset impact of credit portfolio rebalancing.
To leverage on growth in deposit accretions

Bangalore , Nov. 29

With yields showing signs of softening on the back of a rising liquidity, banks have begun extending the maturity of their investments in government securities.

The ten-year yield to maturity dropped by more than 20 basis points over the last three weeks to 7.44 per cent currently.

Bankers said that additions to their investments were being made to their marked to market portfolios, Held for Trading (HTM) and Available for sale (AFS) categories. The purchases were made partly through the secondary markets and some through the primary offerings involving some reshuffling of portfolios including replacement of maturing securities.

In fact, many of the banks were slowly beginning to reverse their derisking strategies adopted during the last two years in anticipation of easy liquidity. The reversal in derisking was partly led by foreign banks. Foreign banks and handful of new private sector banks had taken the lead in moving to long- dated securities. This was after maintaining investment portfolios with an average maturity of about a year, since April last year.

However, bankers said that despite the reversal in derisking, few of them were prepared to extend the maturity of their G-Sec portfolios beyond five years. This was to ensure that the investments remained liquid.

Traditionally in bond markets, it is the short-dated securities that are treated as liquid. In fact, till about a month ago most banks had preferred to hold their HTM/AFS investments mostly by way of treasury bills, 91-day and 364-day T-bills to ensure liquidity.

As a result of these accretions, bankers said the G-Sec investment-deposit ratios had increased close to about 33 per cent over the last three weeks. Bankers said the purchases had also pushed up the average maturity of their holdings in the marked to market categories to five years.

The extended maturity was also being done to improve the average yield on investments. The derisking had pushed down the average yield on investments for most banks to about 6 per cent or less than the weighted average cost of working funds. The extension in maturity, bankers said, was partly intended to correct that situation and push up the yield on investments, at least close to the average cost of deposits or about 7 per cent plus.

Bankers said that this kind of shift was also being resorted to curtail lending flows to certain sectors such as commercial and retail estate as part of the "credit portfolio rebalancing" pushed by the Union Ministry of Finance and the Reserve Bank of India.

Containing credit to these sectors, they said, would likely result in some corrections in yields on advances. It was to neutralise this impact that banks were moving to the longer end of the yield curve, they said.

The shift to longer maturities was also triggered by their focus on retail deposits, from corporate bulk deposits. Retail deposits are treated as less volatile.

Buoyant outlook

Bankers added that the outlook for liquidity remained buoyant in view of the deposit accretions taking place. In fact, deposit growth accelerated during the last few weeks in view of bankers' sustained drives. Outstanding deposits, as on November 10 this year was Rs 23.5 lakh crore or a 21 per cent growth over the corresponding period of last year. Till last September end, deposit growth was only about 18 per cent on a year-on-year basis.

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Banks shift gear, move to long-dated securities