Public sector banks (PSBs) reported net profits in FY21 after five consecutive years of losses, supported by windfall treasury gains, according to ICRA. However, gains are likely to be much lower in FY22, given limited headroom for further decline in bond yields.

The credit rating agency estimated that the 12 PSBs booked profits of ₹31,600 crore from this source, compared to the overall Profit Before Tax (PBT) of ₹45,900 crore in FY21.

Trading gains

Notably, the trading gains for PSBs in FY21 exceeded the capital infusion of ₹200 billion received from the Government of India (GoI).

Notwithstanding the profits reported by the public banks in FY21, the agency said the PBT of other PSBs (excluding State Bank of India/SBI) at ₹18,400 crore were lower than their trading gains (₹25,500 crore), reflecting the challenges posed by Covid-19 on the asset quality and profitability of the banks.

ICRA observed that higher gains were recorded by PSBs on the back of relatively higher statutory liquidity ration (SLR) holdings compared to private sector banks (PvSBs).

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“The onset of Covid-19 resulted in windfall gains for public (sector) banks with trading profits on their bond portfolios rising sharply after the steep cut in policy rates by the Reserve Bank of India (RBI) in March 2020,” said ICRA in a note. Bond yields declined sharply in FY21 amid policy rate cuts following the onset of Covid-19.

Repo rate

The repo rate and the reverse repo rate were cumulatively cut by 115 basis points (bps) and 155 bps, respectively, during March 2020 and May 2020 to 4.00 per cent and 3.35 per cent, respectively, by May 2020.

Anil Gupta, Vice President – Financial Sector Ratings, ICRA, said: “As the banks booked gains on their bond holdings, their fresh investments are closer to the market rates, thereby aligning the yield on their bond portfolios closer to the market rates.

“The yield on the investment book for the public banks declined to 6.18 per cent in Q4 (January-March) FY21 from 6.79 per cent in Q4 FY20.”

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While banks make windfall profits amid the declining yield scenario, they could face challenges in their bond portfolios in a rising interest rate regime, opined Gupta.

“While the RBI is unlikely to be in a rush to hike interest rates in the near term, banks would need to be mindful as treasury profits would be relatively muted in FY22,” he said.

Like PSBs, PvSBs saw an improvement in their trading profits to ₹18,400 crore in FY21 (₹14,700 crore in FY20), which was 21 per cent of their PBT in FY21 (28 per cent in FY20), the note said.

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