Rising US bond yields are creating fresh concerns for Indian markets. However, for Indian banks, the impact is likely to remain mixed. Brokerages and analysts believe that some lenders may benefit from higher lending rates while others could face pressure from rising funding costs and weaker treasury income.
Deven R Choksey, Founder and Managing Director of DRChoksey FinServ believes that the Indian banking system can live with 5% US yields. “Bank stock prices will stay restless until those yields stop making new highs.”
Motilal Oswal also noted that banks may be relatively better positioned than non-banking financial companies (NBFCs). Here is how.
Why US bond yields matter for Indian banks
The US 10-year government bond yield has surged above 5.1%, a level last seen nearly two decades ago. India’s 10-year government bond yield is also around 7.1%. This has narrowed the additional return offered by Indian bonds over US Treasuries.
Choksey highlighted that “When that happens, foreign money becomes choosy, the rupee comes under pressure, and Indian banks feel it in three places: the value of the government bonds they hold, the cost of gathering deposits, and the price the market is willing to pay for bank shares.”
Choksey added that “the problem is not survival. The problem is that the easy part of the profit cycle — falling bond yields helping treasury desks — has turned.”
Banks may face tougher quarters as bond yields stay high
Banks may face tougher quarters as bond yields stay high Choksey expects “the next two quarters for the banks to look messier than the last one.” He highlighted, when bond yields rise, the bonds already sitting on a bank’s books lose market value. This shows up as weaker than other income.
In April-June, SBI’s treasury income was already down about a third from a year earlier. The sharp rise in yields through September is likely to make the July-September quarter tougher on that front.
“Deposit rates will also stay firm because banks are still lending faster than they collect cheap savings. So profits may hold, but they will not look as clean,” Choksey pointed out.
Impact of high yield differs across banks
Choksey said investors should not treat all banks in the same way as the impact of higher yields will differ based on their loan mix, deposit profile and treasury exposure.
He pointed to ICICI Bank as an example of a lender that has maintained healthier lending margins. State Bank of India, meanwhile, has the advantage of scale and improving loan quality but also carries a large government bond portfolio.
HDFC Bank and Axis Bank had already reported thinner lending margins in April-June, according to Choksey.
“A higher-yield world does not automatically lift them the way people assume,” he said.
Rising yields may trigger treasury losses for banks
Sunny Agrawal, Head of Fundamental Research at SBI Securities said, “higher bond yields can result in mark-to-market losses on banks’ treasury portfolios, partly offsetting the benefit from margins.”
“For NBFCs, the impact can be relatively negative, as a higher interest-rate environment increases their cost of funds and can put pressure on margins,” Agrawal added.
Banks may be better placed than NBFCs as yields rise
Motilal Oswal also believes that banks should initially be relatively better positioned than NBFCs, “as floating-rate assets can reprice and stronger deposit franchises can provide some protection from higher funding costs.”
“NBFCs have greater exposure to wholesale funding and refinancing conditions,” Motilal Oswal added.
What investors should watch
“Do not sell good banks in a panic because the US bond market had a bad week,” Choksey cautioned investors. He also warned investors against assuming that higher interest rates are automatically positive for the entire banking sector.
“Higher rates help a bank that can raise loan rates faster than deposit rates. They hurt a bank that is sitting on a large bond book and fighting for deposits,” he said.
Overall for banks it is a wait and watch period where they are assessing the impact of elevated yield levels over the longer term.
Disclaimer: This article provides general market analysis and expert commentary on the impact of US bond yields on Indian banks for informational purposes only. It does not constitute financial advice, an investment recommendation, or an endorsement of any banking stock or strategy. Investors should evaluate their risk appetite and consult a qualified financial advisor before making investment decisions.
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