Banks stare at treasury losses in Q4 as bond yields soar: Deustche Bank report

While banks have bought G-secs at yields of 6.2-6.4%, the bond yields are currently trading at 6.9%, says Deustche Bank in a report on Tuesday


Banks used the negative loan growth and deposits surge during the note ban months to buy SLR investments in 3Q. Photo: Reuters
Banks used the negative loan growth and deposits surge during the note ban months to buy SLR investments in 3Q. Photo: Reuters

Mumbai: Banks’ heavy investments into government securities (G- secs) since the note-ban may turn out to be a bad call as they await a treasury shock in the current quarter following the 45 -50 basis points (bps) spike in bond yields. The bond yields gained after the Reserve Bank of India (RBI) surprised the market with a status quo and more so with its negative stance on inflation, in the 8 February policy review. Since then after the sub-6.3% levels, the yields have rallied 45-50 bps.

While banks have bought G-secs at yields of 6.2-6.4%, the yields are currently trading at 6.9%, says Deustche Bank in a report on Tuesday. Banks have collected around Rs10 trillion in deposits during the note ban period and expect almost 40% of that fresh deposits to remain with them. On top of this treasury loses are weak core income growth, the report said, thus it expects lower earnings in Q4.

“We see near-term impact on banks’ earnings as slow loan growth is likely to result in lower net interest margins (NIMs), while treasury gains a key source of earnings are also at risk after a 45- 50 bps spike in bond yields post the RBI policy. “Also, investment yields for most banks have now come down to nearly 7% and it is very likely that incremental bond gains will be limited. Therefore, we cut earnings estimate to 3-8% for most banks. While all banks will be affected, PSU banks and Axis Bank, ICICI Bank are at higher risks,” Deustche said in the report.

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Banks have been heavily relying on treasury of late, even as banks have used it to make high provisions. Post- demonetisation, the rush of deposits was used to buy G-secs which may also be out of money now. Unlike the past, higher bond yields are not associated with better growth and improving NIMs. Even asset resolutions remain slow.

Banks used the negative loan growth and deposits surge during the note ban months to buy statutory liquidity ratio (SLR) investments in 3Q. Deposit growth in 3Q was 3-10% driving growth in the investment book to 10-30% on a quarterly basis, while system loan growth at 5% remains extremely weak.

Over the past few quarters, treasury gains have been a key earnings driver for most banks, given their struggle with low growth, declining NIMs/fees and higher credit cost. “For state-run banks, treasury gains have been 70-650% of pre-tax profit over the last few quarters.

In fiscal 2017, banks are likely to book about 1.5-2.5% of investment book as gains following a strong fiscal 2016, benefiting from lower rates. Even for fiscal 2018, it sees only 0.7-1% of investment book as gains. But with bond yields now moving up, this may be at risk. State-run banks, especially smaller banks, are more exposed”, the report said.

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