Even as banks are getting ready to announce their third quarter results, major public sector bankers feel their margins are under pressure due to low business income and higher provisioning in G-sec portfolios because of YTM appreciation.

Analysts say Indian bonds completed their worst year in at least a decade amid speculation the central bank will raise interest rates to curb inflation as food prices surge.

The yield on the benchmark 10-year note increased 2.4 percentage points, the biggest gain since at least 1999, according to data compiled by Bloomberg. The domestic bonds which slumped by 5 %. are the worst performers in 2009 among 10 Asian local-currency debt indexes compiled by HSBC Holdings,

The money market players say there is potential for yields to move further upwards by 50 basis points from the existing level of 7.55%-7.7% sometime in 2010-11 as the markets are likely to see many interest-rate increases as the Reserve Bank of India is expected to raise key rates to check inflation.

Speaking to FE, KR Kamath, chairman & managing director, Punjab National Bank, said, ?I agree that my bank?s margin is under pressure and hence it all depends on my ability to sustain in this scenario. While the held to maturity (HTM) segment of the treasury portfolio is not an issue for PNB as it is free from MTM losses, held for trade (HFT) can be a matter of concern to certain extent.??

A top official of the Bank of India said the bank is likely to take a a hit on its net profit during third quarter of the current fiscal. BoI?s credit growth is estimated at 17% on y-to-y basis during the Q3 and 7% over the year so far. ?I am hopeful of achieving the credit growth of 18% by the end of the fiscal,? said M Narendra, ED, Bank of India.

Simultaneously, HSU Kamath, executive director, Canara Bank, said the yields have been in the range of 7.50-7.6% for past one-and-half months. It has been moving up and down in recent months. Hence it would be premature to talk about any hit on my treasury gains due to surge in YTM at this point of time.

Bank of Baroda CMD MD Mallya said the bank?s profitability has been fairly good during the third quarter as it has been able to sustain the growth tempo in the low cost deposits.

Allen CA Pareira, CMD, Bank of Maharashtra, admitted that the bank?s profitability will be moderated during the Q3 2010, in comparison with the profitability during the first two quarters of the current fiscal.