Banks may be able to pare mark-to-market (MTM) losses on their treasury portfolios during the second quarter owing to a smaller hike in the repo rate compared to Q1 and efficient management of the duration on their bond holdings.
Bank treasury officials FE spoke to said while losses are inevitable in a scenario of rising interest rates, the current quarter might be a better one in the absence of a steep climb in bond yields. “There may be some reversal of the MTM provisions booked in the previous quarter. The (benchmark) yield had moved from 6.5% to 7.4%. We are not expecting the 6.5% level in coming days, but depending on the level at which each bank has added bonds, they will see varying amounts of reversal,” said the head of treasury at a large public sector bank (PSB).
The Reserve Bank of India (RBI) hiked the repo rate by 50 basis points (bps) to 5.4% in the August monetary policy meeting, against the cumulative 90-bps hike in May and June. The fact that the next policy meeting is scheduled for end-September is giving banks some comfort, although the possibility of an out-of-turn rate hike is not being completely ruled out.
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PSBs are more prone to losses on account of interest rate hikes, as they tend to have a larger share of their portfolio in longer-tenure bonds. The financial stability report (FSR) for June 2022 said as of March 2022, the tenure-wise distribution of PSBs’ portfolio indicated a marginally higher allocation in the 5-10-year segment and paring of allocation to the ‘less than one-year’ bucket. Private banks were found to have built up allocation in the ‘less than one-year’ bucket and ‘more than 10-year’ bucket.
Apart from the pace of rate increases, banks’ own ability to manage their bond portfolios will have a role to play, said Krishnan Sitaraman, senior director and deputy chief ratings officer, Crisil Ratings. “The higher the duration of the investment book, the higher the losses. We are seeing a mix of two factors play out. One is that interest rate increases in Q2 are lower than that of last quarter, and at the same time, some of the banks are consciously trying to reduce the duration of their books,” he said. Putting the two together, treasury losses should be lower than what was seen in Q1, Sitaraman added.
A clutch of 13 major banks reported treasury losses of Rs 8,808 crore in Q1FY23. State Bank of India (SBI) reported a 6.7% year-on-year fall in its first quarter net profit to Rs 6,068 crore on account of MTM losses worth Rs 6,549 crore.
After the results, SBI chairman Dinesh Khara had said more than the rate hike, the bank’s treasury performance will be a function of how yields on government bonds move. “The provision we have done is at 7.45% (benchmark) G-Sec yield and up to that we are not required to make any additional provisions,” Khara said, adding that if the G-Sec yields go to as high as 7.75%, then also we will have some component for provisioning which will be somewhere around Rs 2,000-3,000 crore depending upon additional provisions that would be required.”
At the same time, the bank expects inflation to trend down and the currency to strengthen, which would keep yields subdued. SBI is thus hopeful of being able to write back part of the MTM provisions in subsequent quarters. If yields cool off to 7.3%, the write back could be to the tune of Rs 1,900 crore, Khara said.