With a sharp rise in bond yields in the third quarter, most banks have been saved mark-to-market (revaluing securities to reflect their current value) losses by a whisker.
The yield on the benchmark 10-year government paper increased by 49 basis points during October-December as expectation of policy tightening by the Reserve Bank of India (RBI) gained momentum after inflation shot up in November.
Rising food prices fuelled the wholesale price index inflation to a 10-month high of 4.78 per cent in November, triggering expectation of unwinding of the stimulus policy by the central bank. The inflation rate was 1.3 per cent in October.
Yields on government bonds across maturities hardened in the third quarter. The closing yield on 10-year benchmark paper on December 31, 2009, was 7.68 per cent, about 50 basis points more than the yield of 7.19 per cent on September 29.
“Overall, the third quarter is likely to be relatively modest in terms of treasury performance, compared to the huge profits registered in first and second quarters, as the rise in yields was not enough to trigger large MTM losses. Overall profitability in October-December is expected to be moderate,” Angel Broking said in a report.
“If yields rose another 10 basis points, we might suffer a loss on our bond portfolio,” said the treasury head of a public sector bank.
Though yields are expected to further harden in the current quarter, analysts say it will be more than offset by higher credit growth and lower bad loans.
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A senior State Bank of India (SBI) official said his bank’s bottom line would not be hurt by hardening yields since income from high-yield bonds was expected to be more than the provision for MTM losses.
“An internal exercise carried out in the middle of the calendar year showed that yields would harden. To benefit from the emerging trends, the bank has been more active in bonds than treasury bills. It picked up bonds carrying higher yields. This bond folio is expected to give returns to cushion the impact of erosion in the value of bonds that are held in the trading portfolio or are available for sale,” the official said.
Bank credit growth, which hit single-digits in the third quarter, was the lowest in more than a decade and would result in muted net interest income growth sequentially, analysts said. In the past couple of fortnights, credit has showed signs of picking up while the deposit growth has moderated due to improvement in capital markets and unattractive returns.
Broking house Motilal Oswal expects a 10-15 basis point net interest margin improvement on a sequential basis for most banks due to falling cost of funds.
The third quarter will also see a rise in provisions by some banks to meet the RBI mandate on loan-loss coverage. Banks that had a provision coverage ratio of less than 70 per cent would have to make more provisions from the third quarter onwards. As a result, bottom lines may come under pressure. RBI has told banks to have 70 per cent coverage by September this year.
SBI, the country’s largest lender, which had a provision coverage ratio of 43 per cent at end-September, may have to provide Rs 1,000 crore more towards non-performing assets in the third quarter, according to Motilal Oswal.
“While operating profit is expected to increase 16 per cent, net profit growth is likely to be (only) 8 per cent as provisions are expected to increase six-fold,” Motilal Oswal said.
Other state-run banks which will have to increase their provision coverage are Bank of India, Indian Overseas Bank and Dena Bank. According to analysts, slippage from restructured loans is the key factor to watch for Bank of India.
Bangalore-based Canara Bank, which also has a low provisioning coverage ratio at 28 per cent, may not have to make a higher provision as RBI has allowed technically written off assets to be included while calculating the ratio. Canara Bank’s technical writeoffs were nearly Rs 1,000 crore, sufficient to reach the 70 per cent level.