PSBs may see Rs 180-200 billion mark-to-market losses in Q1FY19

With the current macro situation bond yields may stay well over 8 per cent levels by June 2018, say experts

In the March 2018 quarter, many public-sector banks (PSBs) reported disastrous performance due to the recognition of high bad loans, following the directive by the Reserve Bank of India, through its February 12, 2018 circular. Though brokerages revised their earnings estimates downwards with steep decline in target prices too, stocks of some PSBs, like State Bank of India (SBI), surged by over six per cent immediately post Q4 results in the hope that major stress may be now over. True, the market may be right in assuming that much of the bad loan stress is reflecting in the stock prices, but, some macro factors don’t seem to be in favour of PSBs.

One of them is the yields on bonds, especially the benchmark 10-year government securities (G-secs). Besides huge bad loans, high yields also dented the profitability of PSBs, especially operating profits in past two quarters with higher mark-to-market (MTM) provisions. Yields are inversely related to bond prices. So, any rise in yields leads to a fall in the value/price of bonds, and vice versa. And, banks are mandated to spare some portion of their operating profits for any erosion in the market value of G-secs held in their investment book under the available for sale (AFS) segment, on a quarterly basis. PSBs are major investors of G-secs and typically hold a large portion under the AFS category. Top five PSBs, for instance, have 28-40 per cent of their investment books under AFS category.

Yields have been marching northwards since past many months. Government bonds (G-sec) yields rose by 66 basis points to 7.33 per cent in the December 2017 quarter, which further increased to 7.4 per cent in Q4. In the first quarter of FY19, bond yields are already up and were hovering at 7.99 per cent on Monday, a rise of 59 basis points. Experts say, the uptrend is likely to persist in the near term. “With high crude oil prices, a weak rupee against US-dollar, the bond market may remain under pressure. Given the current levels, we expect yields to exceed eight per cent level by June 2018,” says Karthik Srinivasan, head-financial sector ratings at ICRA. Also, a 25 basis point hike in interest rate by the RBI, on Wednesday put further pressure on bond market.

PSBs, thus, are likely to see high MTM provisions in the June 2018 quarter (Q1) too. As “for every 10 basis point increase in yields, additional MTM losses could be Rs 30-35 billion,” Srinivasan added. More than half of this would be for the top five PSBs. If the 60 basis point fall in bond yields is to be considered, the PSBs would end up with Rs 180-200 billion in MTM losses in Q1 (without assuming any dispensation that banks may use in terms of spreading these losses).

Having said that, on Wednesday, the RBI allowed banks to spread MTM losses equally over four quarters. Also, as per experts, banks normally reduce AFS pool in the month of April. So, to that extend, the MTM losses would be contained in Q1. The exact impact would depend on these factors and whether banks choose to use the dispensation available to them. SBI, for instance, had chosen to provide for all the bond losses in March quarter, while most others hadn’t.