Mumabi: Profitability of Indian banks is expected to remain under pressure for some quarters because of potential losses of around Rs30,500 crore on their bond portfolio, India Ratings 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 (MTM) on lenders’ non held-to-maturity investment holdings. This will lead to a considerable fall in the banking industry’s treasury income in March quarter with a spillover effect in 2018-19," it said in a note Tuesday.
In the previous financial year, banks had reported a treasury gain of Rs59,800 crore.
Yield on the 10-year benchmark government security has risen by 110 basis points between July 2017 and January 2018.
Of the total potential losses, share of state-owned bank is estimated at Rs24,800 crore, India Ratings said, adding mid-sized banks would be the worst hit because of their treasury books rise after a period of muted credit and large deposit growth, and a steeper treasury profit booking in the previous fiscal.
In the previous fiscal year and large part of current fiscal year, banks had parked their excess deposits as investment in government bonds because of muted demand for credit demand.
“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," it said.
In addition, reduction in held-to-maturity category for bond investment also led to rise in mark-to-market losses, the rating agency said.
The HTM category is excluded from MTM requirements. As the limit on how much bonds can be kept in this category gets lowered, banks have to move bonds to other two categories where they have to revalue securities to the market levels.
Banks have to revalue their bond portfolio at the end of every quarter. In case the value of the securities is lower than the market rate, they are mandated to keep aside funds as mark-to-market provisioning.
India Ratings also said that provision towards migration to new accounting norms Ind-AS will also keep profitability under check.