The effect of higher closing yield of 7.19 per cent on 10-year benchmark government paper at the close of the second quarter compared to 7.01 per cent at the end of the first quarter may be a mixed bag for bank bottom lines.
Analysts said the higher yield would not automatically translate into higher provisioning in the second quarter ended September 30. The impact would differ from bank to bank based on the profile of their portfolios.
Within bond portfolio, where there has been a price erosion, a bank may have to go for provisioning, on the other hand, it may gain in cases where prices have actually gone up (yields have declined).
Another aspect that would limit the impact of the swing in yield in terms of provisioning is the limited size of bond portfolio in the available for sale (AFS) category. The AFS portfolio is subject to mark-to-market (MTM) norms where banks have to provide for erosion in value of bonds. Much of bond portfolio remain in the held-to-maturity (HTM) category.
According to a treasury head of a small private sector bank, whether a bank has to make a provision or book gains depends as to when it picked up the bond. Those who picked up bonds when ruling near the peak (around 7.53 per cent) will be saved from provisioning since yield eased at the close of quarter. Yields have been volatile, partly due to the effect of the huge borrowing programme. The yield on the 10-year bond had moved up to cross the 7.5 per cent mark and later eased close to 7 per cent.
“While this (volatility) does pose risk, it also provides business. We expect to get tidy revenues from bond trading as bank treasury has been active to take benefit of fluctuations in yields,” said a chief executive officer of a medium-sized public sector bank.
A State Bank of India official said while yield on the 10-year benchmark closed higher at 7.19 per cent, the net effect on our bond portfolio remained positive. Bank will not be required to make provision for erosion in value of investments.