As prices of 10-year bonds continue to crash, thanks to rising interest rates, banks are getting ready to book mark to market (MTM) losses in their G-Sec portfolio and take a consequent hit on their profits for Q1FY 2008. The yield on the benchmark 8.24% note due April 2018 shot up by 13 basis points to 9.29% on Tuesday. The yield has risen 60 basis points in the first week of July itself. The price dropped 0.77, or 77 paise per 100 rupee face amount, to 93.31. A basis point is 0.01 percentage point. Bankers point out that the high interest rate caused by soaring inflation is all set to result in mark-to-market (MTM) losses by the banks having a good chunk of G-Sec portfolios. In particular, the banks that have invested in the securities of 10-15 years tenor are likely to book maximum losses. The exact scenario will unfold when the banks declare their results for Q1 FY2009 later this month. FE had carried a report on July 2 saying banks? Q1 results will be hit. The largest lender, State Bank of India (SBI), alone is likely to get the biggest jolt due to mark-to-market losses as its bond portfolio comprises Rs 1,80,000 crore, said an official of the bank. The official explained that that the sale of 81% of the bank?s bond portfolio was protected from mark-to-market losses as they were covered under held to maturity (HTM) category. The bank chairman, OP Bhatt, had recently said that his bank had kept aside a sum of Rs 1000 crore as provisioning for depreciation against the treasury portfolio. SBI has also sought relief from the Reserve Bank of India (RBI) for its recent Rs 9996 crore bonds which it got from the government as the government?s contribution to its rights issue. The bank has requested the central bank to allow it to MTM only 25% of the amount, and keep the rest under the HTM category.
Similarly, Kolkata-based UCO Bank has made a provisioning for Rs 130 crore to cover MTM losses for its G-Sec portfolio. Rana Kapoor, managing director & CEO, YES Bank, said that in the first quarter of the current fiscal, the bank has booked a MTM loss as regards to its investment in the government securities. ?The loss is within the acceptance limit of YES Bank’s strength. We fortunately hold the instrument of an average tenor of 1-2 years,? Kapoor said.
In the prevailing high interest rate scenario, almost all Indian banks are likely to book MTM losses in government securities in Q1FY08, he said.
Analysts point out that inflation has already tripled this year to 11.63% in the second week of June, eroding the value of the returns from debt securities. RBI raised its short term repo rate by 50 basis points on June 24, the most since 2000, to 8.5% to curb price gains. Investors who bought bonds at the recent debt auction appear to be exiting them, as anxiety about inflation and oil prices run high. Yields may remain pressured upward, say analysts.