Banks face Rs 50,000-cr MTM losses as bond yields cross 9%

Written by Vishwanath Nair | Mumbai | Updated: Aug 20 2013, 10:28am hrs
Vishwanath Nair & Aftab Ahmad

With the benchmark bond yield soaring above 9% for the first time since August 2008, banks are staring at potential mark-to-market (MTM) losses worth nearly Rs 50,000 crore on their books in the second quarter.

According to an estimate by the Reserve Bank of India, the hardening of yields by 100 basis points will impact banks investment portfolio including held for trade (HFT) and available for sale (AFS) portfolios by R29,927 crore, constituting 0.34% of total assets and 3.36% of capital funds.

Among bank groups, the impact was most discernible for public sector banks (PSBs) on all parameters. PSBs will take the largest hit by R21,588 crore based on positions as at the end of June.

On July 15, the RBI had first announced liquidity tightening measures to help the falling rupee. This had started pushing the yield upwards significantly. Between then and now, the 10-year benchmark yield has gone up by 167 bps.

Naturally, all banks will suffer from it...We have sounded our concerns to the RBI. We hope that it will come up with some solutions, said Union Bank of India CMD D Sarkar.

Among the worst hit will be public sector banks like Punjab National Bank and Bank of India. According to analysts at Credit Suisse, for every 100 bps increase in bond yield, Punjab National Bank (PNB) is likely to see a hit of 21% on its estimated profit before tax (PBT) for the current financial year. According to an estimate by Bloomberg, PNB's estimated PBT for the year stands at Rs 10,310 crore for FY14. For a 167 bps movement in the yields, a 21% hit to PBT would work out to nearly Rs 4,650 crore for the year.

For State Bank of India, India's largest bank, the PBT for the year is expected at Rs 20,048 crore, while the hit due to a 100 basis point change in bond yields is calculated at 8.6%. As per the increased bond yields, this would amount to nearly Rs 2879 crore for the year.

In the beginning of the financial year, yields were on a downward trend, reflecting a falling interest rate scenario in the market. Since credit growth was low, banks had tied up their excessive liquidity into government securities in their AFS portfolios. The bank's AFS portfolio stands at Rs 1,60,000 crore as on June 30, of which Rs 1,10,000 crore is under government securities.

The domestic bond portfolio will be hit depending on where yields settle at the end of the quarter, unless the RBI allows us to move something back into the HTM category, said Arundhati Bhattacharya, CFO & MD of SBI. Most banks had moved quite a bit of their portfolio into the AFS because they would have liked to have sold it. But suddenly, the rates shot up again; so, we were all caught over there, she added.

Similarly, for Bank of India, the AFS portfolio as on June 30 stood at Rs 1,56,500 crore, which was entirely under government securities. For Bank of India, the hit for every 100 basis point upmove in yields on the FY14 profit before tax is estimated at 15%, by Credit Suisse.

The second quarter will be a sharp contrast to the treasury operations in the April-June 20013 quarter, when most banks had reported treasury gains due to a fall in yields. For the April-June quarter, SBI had reported a profit of Rs 1,138 crore on the investment portfolio. Of this, Rs 864 crore worth of profit came through sale of bonds. Similarly, private sector lender ICICI Bank reported Rs 403 crore worth of treasury gains.