Gilts management key to bank results in third quarter

The financial performance of commercial banks for the third quarter of the fiscal year 2004-05 (October-December 2004) is likely to be a mixed bag.

Those banks which transferred the statutory liquidity ratio (SLR) securities into the held-to-maturity (HTM) segment in the second quarter to ward off any impact of interest rate volatility on their investment portfolio are sitting pretty.

However, others which have not conducted any transfer are likely to take a hit, say banking sector analysts.

Banks such as Bank of India, Corporation Bank, Punjab National Bank, Andhra Bank, Indian Overseas Bank, Syndicate Bank, Allahabad Bank and HDFC Bank transferred their government securities holding from the 'available for sale' category to the 'held to maturity' section in the second quarter to shield their holdings from interest rate fluctuations.

Some prominent banks such as State Bank of India (SBI), Bank of Baroda, Canara Bank, Oriental Bank of Commerce, Central Bank of India have not yet conducted any transfer of securities and therefore have been exposed to interest rate risks.

Interest rates have moved up by around 33 basis points in this quarter. The question is: will all of them post lower net profits in the third-quarter compared with the corresponding period of the previous year?

May be not, since banks like SBI have had a phenomenal credit growth of 25 per cent on a year-on-year basis which will perk up its interest income.

The interest income combined with the investment income earned from high yielding securities in its government securities holding may nullify the treasury losses, analysts said.

In the case of other banks in this category, the picture could be less optimistic with Bank of Baroda recording a credit growth of 15-16 per cent and Canara Bank about 18 per cent.

Said the treasury head at a public sector bank which has not transferred securities, "We will certainly post lower profits than last fiscal's corresponding quarter. There has been hardly any trading opportunity in this quarter to make any money. There has been so much volatility in yields that traders have been timid to take positions."

The 10-year benchmark yield on September 30 was at 6.23 per cent which vaulted to as high as 7.32 per cent in the middle of the third-quarter and is close to 6.56 per cent now.

Since the yields in the market have only gone up since September 30, those banks which conducted the transfer in the second-quarter did it with the minimum provisioning.

When a bank carries out a transfer of gilts, it has to provide for the gap in value between the market price and the acquisition price of the transferred securities.

Reserve Bank of India allowed banks to transfer additional SLR securities to the HTM category as a one-time measure to help them tide over the impact of rising rates.

Union Bank of India carried out a transfer of securities in the third-quarter and will therefore post a one-time dip in net profit. Its excess SLR holding is only Rs 1,200 crore now.