The Hindu Business Line : Bond yields fall below 6%; banks to gain

Thanks to the various liquidity infusion measures by the Reserve Bank of India and on expectations of further cuts in interest rates, the yield on the 8.24 per cent, 10-year 2018 benchmark security has fallen from over 8 per cent in October to below 6 per cent.

On Tuesday, the yield on the benchmark security closed at 5.98 per cent or at Rs 115.95. At the beginning of this quarter, the yield on the 10-year paper was 8.45 per cent and the price was Rs 98.60.

Impact on banks

How much of an impact the falling yields will have on banks’ treasury profits will depend on the proportion of their Held to Maturity (HTM) and Allowed for Sale (AFS) and Held for Trade (HFT) portfolios.

Mr K. Harihar, Treasury Head, Development Credit Bank, said that banks that have more securities in their HFT and AFS category will make more profits, as compared to banks that have majority of their portfolio in the HTM category.

Also, banks that have more long-dated securities will benefit more as the long-term yield curve has come down more sharply than the short-term yield curve, he added.

Widespread rally

According to Mr Hemant Mishr, Treasurer, Standard Chartered, India, as the rally in bond prices is widespread and includes government securities, oil bonds, fertiliser bonds and triple ‘A’ rated bonds, banks would see a significant revaluation of their portfolios.

Mr Vaibhav Agarwal, banking analyst with Angel Broking, said, “Banks with higher proportion of AFS and HFT portfolios will gain more. Some of them are Union Bank of India, Oriental Bank of Commerce and Indian Bank.”

Even those banks that have higher share of HTM portfolio are sitting on potential profits, given the downward pressure on interest rates, said a senior bank official.