Flush with liquidity, public sector banks have been lapping up government bonds. Between April and December 2017, PSU banks net bought government bonds to the tune of ₹63,300 crore, while private sector banks remained net sellers through most of the year at around ₹21,100 crore.

Aggressive buying and a rise in PSU banks’ available-for-sale (AFS) book over the past two quarters are likely to lead to substantial mark-to-market (MTM) losses in the December quarter. After raking in tidy treasury gains in the September quarter, the sudden spike in bond yields by about 70 basis points, over the past three months, will impact the earnings of state-owned banks in the December quarter.

Buying spree Data from the Clearing Corporation of India (CCIL) show that PSU banks have been net buyers of government securities through most of FY18, with buying activity picking up pace since August when they bought bonds to the tune of ₹36,243 crore. From September to November, PSU banks’ net buying averaged at around ₹24,000 crore. They continued to remain net buyers in December as well.

Making hay Buying government securities had aided PSU banks’ earnings in the September quarter. Bank of Baroda, for instance, had gained about ₹645 crore on sale of investments, while Canara Bank and Bank of India had made a tidy sum of ₹566 crore and ₹743 crore, respectively, in the September quarter. SBI had made a whopping ₹8,566 crore from the sale of investments.

While PSU banks were net buyers in the September quarter, they also sold tgovernment securities to the tune of about ₹9.3 lakh crore, according to CCIL data, raking in treasury gains. This was higher than the ₹8.6 lakh crore they sold in the June quarter.

But in the December quarter, data suggests that PSU banks have sold a much lower ₹5 lakh crore of government bonds, as rising bond yields played spoilsport. This implies that these banks will not have treasury gains to bump up their earnings. Instead, MTM losses on the AFS portfolio can hurt profits further.

Rise in AFS portfolio Banks are allowed to keep a portion of their SLR securities under the HTM, which do not have to be adjusted to reflect their market value at the end of every quarter. But banks have to mark-to-market investments parked in the AFS book.

PSU banks have seen a sharp rise in their AFS book since the March quarter. The sharp rise in bond yields in the December quarter is hence, likely to lead to substantial MTM losses.

BoB, for instance, has seen its AFS book increase from ₹32,726 crore in the March quarter to ₹63,951 crore in the September quarter. PNB’s AFS book has gone up from ₹65,606 crore to ₹84,227 crore during this period, while for Allahabad Bank securities under AFS has risen from around ₹17,000 crore to ₹21,000 crore over the past two quarters.

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