State-run banks may see recovery of MTM provisions for first half of FY19

MTM gain and availability of liquidity mitigates pressure to increase deposit rates, amid relatively slower growth in deposits

Apart from the central government’s direct support in the form of additional capital infusion to some public sector banks, a sharp correction in government bond (G-Sec) yields has also been of help.

 The Nifty PSU Bank index surged 14 per cent in the December quarter, against a 0.6 per cent fall in the general benchmark Nifty 50.

As of end-December, yield on the 10-year G-Sec stood at 7.37 per cent versus 8.02 per cent at the end of September. With the recent fall amid significant recovery in crude oil prices, softening food inflation and the Reserve Bank of India’s (RBI’s) bond purchase under open market operations (OMOs), state-run lenders could recover the mark-to-market (MTM, repricing at current valuation) provisioning they had made for the financial year's first half (H1, over April-September). 

Analysts at Motilal Oswal Securities expect these entities to report healthy write-backs (recovery) of these amounts. 

In the past few quarters, high G-Sec yields had worsened the pain at bad loan-ridden PSBs. BY RBI rule, banks must keep aside a specified portion of their operating profit on a quarterly basis for the notional loss due to an erosion in market value of the G-Secs they have, under the Available for Sale segment of their investment book. PSBs are major investors in G-Sec.

In H1, this MTM provisioning dented 28 per cent of operating profit at PSBs. With the December level of yields,they should see a combined MTM provisioning write back of around Rs 21,000 crore.

Ratings agency ICRA says their MTM provisioning for H1 was Rs 20,673 crore. Anil Gupta, the head for financial sector ratings at ICRA, says there would be a Rs 3,000-3,500 crore provision write-back for every 10 basis point fall in G-Sec yield sequentially.

Beside provisioning write-back, lower G-Sec yields would help in terms of liquidity. According to CLSA, banks might push sale of G-Secs to book gains. This would help expand the liquidity base, enabling higher credit growth amid the problems at non-banking finance companies and housing finance companies.

MTM gain and availability of liquidity also mitigates pressure to increase deposit rates, amid relatively slower growth in deposits. This would propel the spread (difference between cost of funds and yields earned on the loan book) and net interest margin (NIM) of many PSBs. 

RBI data says total banking credit grew about 15 per cent as on December 7 over a year, while deposits rose 9.5 per cent.

Analysts at CLSA foresee a 5-10 basis point NIM expansion at banks with a high current and savings account (Casa) base. State Bank of India, Bank of Baroda and Punjab Nation Bank, for instance, had a 35-45 per cent Casa ratio as on end-September. This and the expected healthy credit growth should boost revenue.

However, Dhaval Dalal, chief investment officer at Edelweiss Asset Management, believes the recent fall in crude oil prices and food prices might not sustain for long. And, concerns on  the government’s fiscal deficit, likely end of OMO bond purchase and fresh supply in the new fisnancial year could cause some hardening in G-Sec yields.