Closure of treasury trove to show on bank bottomlines

Most banks are expected to post lower net profits in 2004-05 compared with the preceding fiscal year in the absence of treasury profits.

Corporation Bank has already set the trend by posting a 20 per cent decline in its net profit for 2004-05. The public sector bank took a one-time provisioning hit of Rs 280 crore when it transferred a part of its government securities portfolio to the held-to-maturity (HTM) category to shield itself from a further rise in interest rates.

In 2003-04, banks made windfall gains largely on the back of treasury profits as interest rates fell by 200 basis points. Net profits were up by 30 to 40 per cent in 2003-04 against the usual 15-20 per cent in preceding years.

This year, however, banks have not only been hit by rising rates as the 10-year paper rose by 156 basis points in 2004-05, but also as they chose to shield themselves against further increases in interest rates, many banks took a one-time provisioning hit.

Corporation Bank made a provisioning of Rs 280 crore in the last quarter of 2005 as it rejigged its investment portfolio. This is in addition to it having made a similar provisioning of Rs 205 crore in the third quarter ended September 2004.

Most banks have followed a similar practice in previous quarters. For instance Syndicate Bank took a provisioning hit of Rs 318 crore in the third quarter.

"We expect many banks to report lower profit figures vis-à-vis fiscal 2004 predominantly on account of the non-availability of profit on sale of investments, which the banks had availed of in the preceding year. In fiscal 2005, a number of banks have also moved a portion of their investment book to the HTM bucket and along with this taken a one-time provisioning hit on their financials," said Arun Panicker, director - financial sector ratings, Crisil.

With treasury operations having become unattractive during the fiscal, banks have re-focussed their attention on the core business of taking deposits and giving loans and, thereby, generating net interest income.

As interest rates soared during 2005, and government security prices fell, banks stayed away from the debt markets.

"Even though loan growth is higher than in most years at an average of 20-25 per cent on a year-on-year basis, this will not make up for the lack of treasury income particularly because of the one-time hit that most banks have taken in transferring securities to the HTM basket," said Sejal Doshi, research analyst, Angel Broking Ltd.

Private banks, which were not aggressive in investments in government securities and large public banks, adroit in treasury management, could however buck the trend, said analysts.

Among private banks, HDFC Bank and UTI Bank have already posted encouraging results for the full year ended March 2005 with a 30 per cent and 20 per cent rise in net profit, respectively.