The Hindu Business Line : Banks may take a hit on corporate bonds portfolio

Mumbai, Oct. 2 Banks may take some hit on their corporate bonds portfolios in the second quarter following the higher spreads declared by Fixed Income, Money Markets and Derivatives Association (FIMMDA) in its benchmark valuations announced on September 30, 2008.

According to bankers, the spreads are higher compared to those in the previous quarter. From September, FIMMDA has introduced a system of declaring the spreads for corporate bonds based on three different classifications — public sector undertakings; NBFCs and corporates; and banks and financial institutions. Earlier, FIMMDA used to declare a common spread.

As on September 30, 2008, the spreads for 10-year papers of ‘AAA’ rated companies, announced by FIMMDA were PSUs at 213 basis points, FIs and banks at 208 bps and NBFCs and corporates at 238 bps.

When compared to the common spread of 156 as on June 30, 2008, the difference is the highest for NBFCS and corporates. “A bank which holds a higher share of bonds of NBFCs and corporates will see more depreciation than a bank which has a higher share of bonds of banks or PSUs,” said a senior treasury official with a public sector bank.

bond portfolios

Banks value their bond portfolios and make the provisioning, at the end of every quarter, based on the valuation declared by FIMMDA. Bond prices are inversely linked to yields or spreads. When yields rise, prices fall. Therefore, banks will have to make higher provisioning for their corporate bonds portfolios, based on the FIMMDA valuations.

In case of government securities, the yields set by FIMMDA are only marginally lower, which will not give banks too much relief, said the bank official. “The net loss or gain will depend on the portfolio composition of banks,” he said.

The yields declared by FIMMDA for G-Secs are higher than those prevailing in the market a few days ago. But as the yields are lower compared to those declared in June 2008, the impact on the G-Sec portfolios will not be much, said treasury officials.

As on September 30, 2008, FIMMDA set the yield for the benchmark 8.24 per cent 10-year 2018 paper, at 8.65 per cent, which is lower than the yield of 8.7 per cent as on June 30, 2008. As per CCIL’s Order Matching System, on September 29, the yields were at 8.61 per cent, marginally lower that FIMMDA’s yields. The yields started moving up once the government announced an unscheduled auction of Rs 10,000 crore on September 24.

‘yields up’

A bond dealer with a private sector bank said, “Post the auction announcement and the devolvement of the paper on primary dealers, the yields on government securities have gone up. As banks have to follow the yield set by FIMMDA for valuation purposes, our portfolios could see some depreciation due to the yields moving up in the last few days of September.”

Another treasury head of a public sector bank said, “The spreads on corporate bonds are too high. If FIMMDA had announced earlier that there would be different spreads, we probably would have reduced our investment in corporate bonds.”

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