Mumbai: The recent spike in government bond yields are credit negative for public sector banks (PSBs) as it would affect the lenders overall profitability, says a report.

As of 12 January, the 10-year benchmark bond yielded 7.28%, more than 30 basis points higher than two months earlier. The report by Moody’s said in the last few quarters, a large proportion of PSBs’ operating profit was derived from the profitable sale of investments, which also cushioned necessary high loan loss provisioning.

“The rising yields and falling prices are credit negative for public-sector banks (PSBs), which are exposed to mark-to-market (MTM) losses from the government bonds’ reduced value in their investment portfolios," the report said.

It expects MTM losses to result in a significant decline in PSBs’ overall profitability because the banks will lose a key source of operating profit. Over the past few quarters, the contribution of profits on the sale of investments to operating profits increased significantly, reaching more than 50% for some banks such as Central Bank of India and Oriental Bank of Commerce.

The rating agency’s rated PSBs averaged a 41% contribution to operating profit from gains on the sale of investments in the quarter that ended 30 September 2017. It said on an average, its 10 rated PSBs invested 21% of their total assets in government securities as fiscal ended 31 March 2017.