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Our Bureau The banking industry’s profitability would be affected to the tune of ₹30,500 crore this fiscal (FY18) due to treasury losses emanating from the quick rise in bond yields, according to India Ratings and Research (Ind-Ra) estimates.
The credit rating agency observed that public sector banks (PSBs) would continue to report losses in FY18. One basis point equals one-hundredth of a percentage point.
Ind-Ra has said: “The large losses emanating out of the quick rise in bond yields, especially in the last six weeks, will result in large mark-to-market losses on lenders’ non-HTM (held-to-maturity) investment holdings.
“This will lead to a considerable fall in the banking industry’s treasury income in the January-March (Q4) FY18 period with a spillover effect in FY19. In FY17, banks reported a gain on treasury of ₹59,800 crore.”
The agency believes mid-sized banks would be the worst hit, considering their proportionally swollen treasury books, after a period of muted credit and large deposit growth, and a steeper treasury profit booking in FY17.
Out of the total potential loss, the share of PSBs will be ₹24,800 crore in FY18 (FY17: profit of ₹42,700 crore) and that of private sector banks ₹5,700 crore (profit of ₹20,100 crore).
Ind-Ra believes the resulting treasury loss will impact the renewed vigour post announcement of bank recapitalisation.
After successive fall in bond yields starting from January 2015, rates have hardened from July 2017. The 10-year benchmark yield has moved up to 7.60 per cent in January 2018 from 6.50 per cent as on July 2017, up 110 bps in six months.
Excess SLR investments
According to Ind-Ra, the banking system’s investments increased significantly in FY17 and FY18 as banks, constrained by capitalisation and low credit offtake, parked their deposit accretion in low-risk government securities.
“As the yields were falling, some of the banks used realised gains to offset the profitability pressure on the core business. As the interest rate curve shifts, many of the banks, especially mid-sized banks, could face large provisioning requirements,” the agency said.
Further, the proportion of investment book that is exposed to mark-to-market (MTM) losses has increased significantly over the years as the cap on HTM reduced to 19.5 per cent in FY17 from 22 per cent in 2015. With the rising bond yields, banks will have to provide MTM losses on these investments.
Mounting treasury losses
The agency also expects the additional burden emanating from migrations to Indian Accounting Standard (Ind-AS) and step-up in provisioning due to faster resolution of stressed assets would further dent banks’ profitability. It believes that scheduled commercial banks may need up to ₹89,000 crore towards incremental provisioning for advances while transiting to the Ind-AS 109 regime.
The Ind-AS 109 regime establishes principles for the reporting of financial assets and liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows.
Core earnings
Ind-Ra believes that with a recovery in demand for bank credit, banks with better capitalisation may raise lending rates to improve net interest margins. Moreover, the building-up of consensus towards a rise in rates by the Reserve Bank of India would entice banks to pre-empt asset repricing decisions.
Hence, growth in advances and a likely improvement in spreads will aid banks’ pre provisioning operating profitability.
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