Rising profits from a government bond rally are set to bolster profits at India's biggest banks, helping extend a seven-month advance in their overseas debt.
The yield on State Bank of India’s dollar notes due 2014 slid 25 basis points this month to 2.19 per cent, while a similar gauge on ICICI Bank Ltd’s 2015 securities fell 35 basis points to 2.48 per cent. The rate on Bank of China Ltd's 2016 bonds dropped 12 basis points to 1.58 per cent. Indian lenders raised sovereign bond holdings by 12 per cent this financial year, as 10- year yields declined 68 basis points to 7.86 per cent.
Fixed-income gains are bolstering banks' treasury income at a faster pace this fiscal year, as cooling inflation and slowing economic growth raise the odds of an interest-rate cut by the central bank, according to IndusInd Bank Ltd and YES Bank Ltd. Sovereign bonds returned 11 per cent in the past year, the best performance in the region, HSBC Holdings Plc indexes show. Local lenders' holdings rose by a net Rs 2.6 lakh crore ($48 billion) to Rs 19.4 lakh crore in the period.
“Banks’ treasury gains are expected to see a considerable increase going ahead,” Vishal Narnolia, a banking analyst at Mumbai-based brokerage SMC Global Securities Ltd, said in an interview yesterday. “Government bonds will rally further on a possible rate cut. This is one of the positive factors for Indian banks now and is boosting investor confidence and helping the rally in their dollar debt.” Yields on the overseas bonds of State Bank and ICICI fell this month even as the average rate on Asian dollar notes added four basis points to 3.47 per cent, according to HSBC data.
Bond rally
Ten-year government bonds completed a fourth quarterly gain on December 31, the longest winning run in a decade, after the Reserve Bank of India Governor Duvvuri Subbarao said last month monetary policy needs to shift focus toward supporting the economy from containing inflation. The yield on the benchmark 8.15 per cent debt due 2022 fell one basis point to 7.86 per cent yesterday, offering an extra 603 basis points over US Treasuries, while the rupee weakened 0.1 per cent to 53.7550 a dollar.
Net income at State Bank, the nation's largest lender, rose an average 144 per cent in the first three quarters of last year, the most recent data compiled by Bloomberg show, compared with a 31 per cent decline a year earlier. Profit at ICICI Bank, the third-biggest lender, increased an average 32.4 per cent in the nine months ended September 30.
'Driver of growth'
RBI will lower its repurchase rate to 7.75 per cent from eight per cent at a January 29 review to spur growth, according to 11 of 14 analysts in a Bloomberg survey. Two predict a cut to 7.50 per cent and one sees no change. Asia's third-largest economy may expand as little as 5.7 per cent in the year through March, the least in a decade, according to the finance ministry's estimates.
“Indian banks are sitting on treasury profits as bond prices have been rising on expectations of monetary policy easing,” Romesh Sobti, Mumbai-based chief executive officer at IndusInd Bank, said in a January 9 interview. “It is up to each management to decide when they want to book these profits.”
Indian banks' bond risk is falling. The average price of contracts that insure the debt of five financial institutions against non-payment for five years has slid 72 basis points in the past year to 222, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.
Funding Costs
Lenders' profits are also set to increase after policy makers pumped record cash into the financial system to support the economy, cutting interbank funding costs to a two-year low.
The RBI released more than Rs 2.7 lakh crore in 2012 by cutting banks' reserve requirements and buying sovereign debt, helping lower three-month money-market rates by 92 basis points to 8.92 per cent. Subbarao cut the proportion of deposits lenders must set aside, as reserves by 175 basis points last year to a 36-year low of 4.25 per cent, the biggest annual reduction since a 200 basis point drop in 2008.
"Measures taken by RBI to ease liquidity, including reserve-ratio reductions and open-market debt purchases, have brought some relief to the banks," Hatim K Broachwala, a Mumbai-based banking analyst at brokerage Karvy Stock Broking Ltd. "The impact will be most evident on funding costs of smaller banks such as YES Bank and Kotak Mahindra Bank."
Money markets
Falling money-market rates have helped boost interest income at India's biggest banks. Net interest income at State Bank rose 26 per cent in the first half of 2012 from a year earlier to Rs 31,040 crore, data compiled by Bloomberg show. A similar measure at ICICI Bank Ltd rose to Rs 9,670 crore in the first nine months from Rs 7,430 crore a year earlier. That helped the bank post a record profit in the third quarter.
The BSE India Bankex Index, which tracks the shares of 14 local lenders, surged 33 per cent in the past 12 months, beating a 20 per cent advance in the benchmark Sensitive Index.
"In an easing interest-rate scenario, the rise in prices of government and company debt we are holding will be a driver of profit growth," Rana Kapoor, managing director of Mumbai- based YES Bank, the best performer in the past year on India's Bankex index of lender stocks, said in an interview on January 16. "We are expecting a 100 basis point cut in rates in 2013."
