Boosted by a 60-bps decline in bond yields between end-June and end-September, treasury gain could be a bright spot in an otherwise weak September quarter earnings for public sector banks, analysts believe.
The yield on the benchmark bond, which stood at 7.45% on June 30, fell to 6.82% on September 30. In the Q1, the yield had fallen 20 basis points.
With banks holding at least 20.75% of their net demand and time liabilities in the form of SLR securities, they are likely to make sizeable gains in the September quarter. Depending on the maturity, yields on government securities dropped 50-70 bps in the quarter ended September.
In the June quarter, Punjab National Bank had reported a treasury income of Rs 601 crore, while Union Bank reported an income of Rs 321 crore.
Banks typically hold about 70% share of their total investments in the HTM category which they will mark to market. Depending on the extent to which they have traded from their AFS (available for sale) category, the impact on Q2 FY17 profits resulting from the drop in yields could be significant and potentially boost second-quarter earnings,HSBC Global Research said.
“Yes, there will be mark-to-market gains on the HTM book, which will help lower the provision line. In the AFS book, it depends on management strategy. Some banks may believe there is more scope for rates to go down and leave bulk of the gains for another quarter – making partial bookings this time,” an analyst from a foreign brokerage told FF.
Since most PSU banks hold bonds of three-four-year duration, a 50-bps change in yields translates to nearly 150-200 bps profit in the books of the bank. “However, each of these portfolios have a mix of commercial paper and other papers that are less sensitive to interest rates. We believe that the gains could be about 125-150bps,” wrote analysts from Kotak Institutional Equities Research.
Bond gains could also be offset by higher pension liabilities, which typically rise with a drop in the bond yield, said Nilesh Parikh, associate director at Edelweiss Financial Services. Union bank, SBI, Punjab National Bank and Canara Bank are among the lenders that will benefit most from the movement in bond yields, he added. Among private sector banks, IDFC Bank is likely to be the biggest gainer because nearly 50% of its balance sheet is invested in bonds.
PSU banks are otherwise expected to report weak earnings for the September quarter, hampered largely by weak demand for credit and toxic assets. According to a Bloomberg estimate, among PSU banks, SBI is expected to report a profit of Rs 2,595 crore, a 33% drop over the corresponding quarter last year.
Punjab National Bank may report a profit of Rs 490 crore, down 21% year-on- year, while Canara Bank is expected to report a profit of Rs 301 crore, falling 43% from the last year. Private sector banks, on the other hand, are seen doing better.