 "Treasury gains, G-Sec, banks, bad loans")
Demonetisation is likely to hurt banks' performance in the December quarter on multiple fronts, but some of this could be offset by leeway on bad loan recognition as well as the fall in yields on government securities.
Credit growth, which was already muted, is likely to be further affected as banks' regular operations were hit in the initial phase of demonetisation. Most banks could witness a one-time surge in employee costs as they recruited temporary staff and paid overtime for long working hours following demonetisation.
Other expenses like cash distribution activities and ATM re-calibration increased during the quarter. These higher costs will eat into the margins of banks.
A silver lining for banks during the quarter is the likelihood of higher treasury and mark-to-market gains. The average yield on the 10-year gilt has fallen from 7.12 per cent in the September quarter to 6.57 per cent in this quarter. This will provide a leg up to banks' operating profits, according to analysts.
"Yields have crashed and banks have made great gains. The up move in yields over the last 10 days will not erase the positives from the fall in the initial 45 days of the quarter," says Aalok Shah, a banking analyst at Centrum Broking.
Nitin Aggarwal, a banking analyst at Antique Stock Broking, estimates every half a percentage point decline in yields can increase public sector banks' operating profits by 7-8 per cent. Banks could witness a 30-50 per cent sequential increase in their operating profit, he adds.
Soumyajit Niyogi, associate director, credit and market research, India Ratings, however, points out the quarterly number will depend on banks' decisions to book profits during the quarter. “They may not book all the gains in the third quarter,” he adds.
“Public sector banks have already reported treasury gains of about Rs 17,400 crore in the first half of 2016-17. They are more stressed in profitability and capital requirements. Overall, the fall in yields is asymmetric. Banks with large net demand and time liabilities will gain the most," he says.
Niyogi expects public sector banks to book treasury gains of Rs 38,200 crore in 2016-17, suggesting that the second half of the year could see a figure of Rs 20,800 crore.
For individual banks, the quantum of treasury gains, however, will vary. Alpesh Mehta, a banking analyst at Motilal Oswal Securities, says, “Trading gains are also a function of high volatility in yields. A good banker will always make more money in times of higher volatility.”
While these treasury gains could help shore up banks' earnings, some banks may also deploy them to step up their loan loss provisions, analysts say. In either case, this metric will be a key monitorable.
