Mumbai: Profits from treasury operations of banks, especially that of public sector banks, are likely to be hit in the last quarter of current financial year as long tenure government bonds witnessed a sharp spike in yields since December last year.
Even treasury profits for the third quarter ending December 31 would also reflect this trend, bankers and analysts said.
“Treasury profits of banks have already come under stress in the Q3 of this fiscal. With spike in 10-year benchmark bond yields, net earnings from treasury operations will also be adversely impacted in the January- March period,” Former Treasury Head of Union Bank of India, V J Mhatre told The Finapolis.
Bond yields have stayed below 7% for quite some time in 2016 and 2017 as macroeconomic indicators like inflation and fiscal deficit remained benign to support these levels.
However, spike in international crude oil prices and deteriorating public finances raised concerns over possible breach of fiscal deficit target since November last year. This led to average Q3 yields of 10-year government bonds touching 7.33%, which peaked at 7.4% towards the end of last year.
“Yield movements in three weeks of December must have shaved off most treasury gains of the banks. This loss from treasury operations would also eat up trading gains. Also, additional liability in the form of mark-to-market (MTM) loss is likely to arise for many banks,” Mhatre said.
According to a report by rating agency-ICRA, banks are sitting on a MTM loss of around Rs 15,000 crore due to the recent surge in long tenure bond yields.
“The 67 basis points surge in yields on the 10-year government security on the back of higher-than-budgeted fiscal deficit, is likely to result in MTM losses to banks on their investment portfolios in Q3 to the tune of ₹15,000 crore,” the rating agency said in the report. Most of the estimated loss will arise in the books of public sector lenders, the report added.
Interestingly, banks had booked astronomical profits of close to Rs 1 lakh crore during January-March of 2016 to July-September of 2017 period on the back of fall in bond yields. Out of this, state-run banks were the major beneficiaries with a share of 74% of the total gain due to their excess G-sec holdings, the ICRA report said.
With reversal in yield movements, public sector banks may report higher MTM losses during the last two quarters of current financial year.
Market experts are also of the view that with inflation inching up, probability of a rate cut by the Reserve Bank of India seems remote in the coming quarters. In that scenario, possibility of easing of bond yields remains a far cry in the near future. “Under the current circumstances, treasury profits of banks will depend on dealing room,” Mhatre added.