State Bank of India (SBI), the country’s largest lender, is expecting a mark-to-market (MTM) loss of Rs 500-700 crore during the current quarter due to rising bond yields, said Chairman O P Bhatt.
MTM is the writing down of securities to reflect current market value.
Yields on government bond have hardened by about 29 bps since January. On Friday, the benchmark 10-year government bond closed at a 17-month high of 7.97 per cent. There are expectations among market players that bond yields could cross the 8 per cent mark over the next few weeks.
Banks have to arrive at the market value of their bond portfolio based on the yield on the last day of the quarter. Banks, especially public sector players, have been further affected by rising yields as they have run out of headroom in putting bonds in the held-to-maturity category that does not require MTM accounting. With a record borrowing of Rs 451,000 crore this year, and low credit demand, banks had little option but to buy government securities.
SBI had reported net profit of Rs 2,479 crore in the third quarter of 2009-10, 0.03 per cent growth as compared with the same period in the previous year, as it had to book a Rs 246 crore MTM loss on the bond portfolio as compared with a write-back of Rs 342 crore in the corresponding period last year.
The flat growth in profit was partly due to investing a portion of the excess liquidity — estimated at Rs 75,000 crore — into instruments to shore up its statutory liquidity ratio. This exposure resulted in an additional MTM loss of Rs 45 crore during the quarter.
Unlike other banks, SBI’s problems are compounded by the government issuing bonds worth Rs 10,000 crore as its share of subscription to the rights issue.
