As rising bond yields erode banks’ treasury income, the Fixed Income Money Market and Derivatives Association of India (FIMMDA) has requested the Reserve Bank of India (RBI) to allow lenders to move some of their securities held under the available-for-sale (AFS) category to the held-to-maturity (HTM) category, bankers told FE.
Banks are required to adjust securities held by them under the AFS category to reflect their value as per prevailing market rates. This is not the case for HTM securities, which bear the yield set at the time of issuance right up to the time of maturity.
If accepted, the representation could result in banks salvaging their January-March bottom lines to some extent. “Banks will definitely benefit because if MTM (marked-to-market) losses are likely to happen, they will not occur if you transfer it from available-for-sale to HTM,” said a senior executive with a mid-sized private bank.
Profitability at banks, especially at state-owned lenders, is widely expected to be hit by the uptrend in bond yields that began after the RBI’s change of stance to ‘neutral’ from ‘accommodative’ in its February credit policy. The benchmark 10-year government bond closed at 6.903% on Tuesday, as against 6.430% on February 7, before the RBI policy.
In a note dated February 27, Deutsche Bank had reduced its FY18 earnings estimates for most large banks by between 3% and 8%. “Even for FY18, we are currently building in 0.7-1% of the investment book as gains. However, with bond yields now moving up, this may be at risk. PSU banks, especially smaller banks, are more exposed,” the investment bank wrote.