‘Fall in bond yields helping banks ring in higher treasury gains’

With falling bond yields, the Available-for-Sale (AFS) book of public-sector banks has seen quite a good run over the past few months. Banks are now making hefty treasury gains from the rise in the bond prices. Speaking to BTVi , Federal Bank Executive Director and Chief Financial Officer Ashutosh Khajuria says the movement of yield for the 10-year benchmark alone has been more than 50 basis points, which effectively means a gain of ₹3-3.50 for every ₹100 on bond price. This will definitely help banks clean up their balance sheets on the backdrop of the credit quality concerns, he said. Excerpts:

What’s the size of your AFS book right now?

The size of the book for any bank would be a function of how much extra SLR (statutory liquidity ratio) one keeps because most of the banks try to keep the SLR requirement to that extent in the HTM (held-to-maturity) book.

And as per the provisions in the beginning of the year, banks can shift securities from HTM to AFS or AFS to HTM only once a year. So, depending upon the liquidity requirements or the shuffling of the securities, the decision is taken. I think there has been a good rally in bonds and as a result of that those banks which are having excess SLR will definitely benefit. The rally has happened from around a 10-year benchmark yield of 7.50-per cent level to nearly 6.90-6.95 per cent to the new 10-year yield at 6.82-6.83 per cent.

I think the movement of yield for the 10-year benchmark alone has been of the order of more than 50 basis points which effectively means a gain of ₹3-3.50 for every ₹100. It is a pretty good move. This move will definitely help banks clean up their balance sheets to the extent of the credit quality concerns. Higher the SLR, more would be the benefits to the banks.

At the same time, if you maintain too high an SLR, it simply means you are not able to provide enough credit, and the earnings on the interest side will be muted as credit, in any case, will give a higher yield compared with the sovereign bond. This is the trade-off. On one hand you get the capital gains, on the other hand — because you are not being able to give enough credit — the earnings on the interest would be quite muted.

Yet a sudden movement in the yield would benefit much more than what the interest gains would have happened on the rate side. With the result of the consistent movement of the interest rate of the economy — whether it is MCLR (Marginal Cost of Funds-based Lending Rate) or the base rates of the bank, the policy signalling rate, which the RBI stated from January 2016 — in the last 18 months, we have seen a fall in the policy rates by 150 basis points. I would say it could be a boon for the banks.

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