Banks set for big treasury gains as bond yields fall 65 bps in Q3

By: | Updated: January 7, 2015 1:51 AM

Helped by a massive 65-basis-point fall in the government bond yields in the October-December quarter...

Helped by a massive 65-basis-point fall in the government bond yields in the October-December quarter, most Indian banks are likely to post big treasury profits in the quarter, said bankers and analysts.

Bankers say the treasury gains for most banks in the quarter would be at least Rs 50-100 crore more than the July-September quarter. “Treasury gains will be good, and banks that have taken advantage of the big fall in yields will reap the most,” said KN Reghunathan, head of treasury at Union Bank of India.

The government bond yields have fallen around 50 bps across tenures and the yield on the 10-year benchmark 8.40%, 2024 bond, has dropped 65 bps in the October-December quarter. This is the biggest quarterly drop in yields for the 10-year benchmark since December 2008. On Tuesday, the bonds closed at 7.90%. According to Motilal Oswal, a 100-bps fall in bond yields would boost the profits before tax of large public sector banks by at least 7 bps.


“Most banks would have also have written back provisions made earlier when yields were high. This along with realisations through sale of investment will boost the net profit of most banks considerably,” said Ashutosh Khajuria, head of treasury at Federal Bank.

Banks need to provide for mark-to-market losses on their bond portfolio as per the RBI rules. In those quarters when bond yields fall, banks typically write back provisions made earlier apart from booking profits through selling bonds. Some banks may also get additional gains by selling securities held under the HTM category. “Banks may also book additional gains by selling HTM securities. Banks are not required to disclose for sale upto 5% of opening balance,” said Motilal Oswal in a report.

Banks hold both sovereign and corporate bonds under three categories — held-to-maturity, held-for-trading and available-for-sale. Both the HFT and AFS portfolios have to be marked-to-market, according to the RBI rules.

According to the latest RBI data, the banking system’s investments in government securities were at 29.64% of deposits as of December 12.

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