By Manish M. Suvarna & Piyush Shukla
Treasury income of banks took a hit in the October-December (Q3) quarter, due to a sharp rise in yields on government securities, which has impacted investment portfolios of banks. The yields on government securities rose over 50 basis points (bps) in Q3 due to various factors such as an uptick in US Treasury yields, volatile Brent crude oil prices and discontinuation of government securities acquisition programme (G-SAP), among others.
A 50-bps increase in portfolio yields leads to treasury loss of Rs 5,800 crore for State Bank of India, Rs 1,100 crore for Punjab National Bank, and Rs 480 crore for Canara Bank, according to Motilal Oswal Securities. Analysts expect MTM losses for banks, especially public sector banks, to increase in the coming quarters as yields on government securities are continuously rising.
The state-owned lenders will take a major hit because they have a higher share of government securities in their portfolios. SBI has the highest share of Available for Sale (AFS) and Held for Trading (HFT) portfolio at 43% of total investments, the brokerage said.
“These are mark-to-market (MTM) losses that banks face due to upward movement in yields on their available for sale and held for trading investment book. The lower income from treasury or losses as the case may be for different banks are likely to continue with an upward movement in yields. However, this could be partially offset by the actuarial benefits on the pension liabilities and to some extent by the higher income on newer bonds that banks will be buying with higher yields,” said Karan Gupta, director — Financial Institution, India Ratings and Research.
The surge in Brent crude oil prices in the international market during October-December led to inflationary pressure, which resulted in offloading securities by some investors. The rise in crude oil prices leads to higher imported inflation for large consumers like India. Meanwhile, during that period US Treasury yields also rose on expectations of faster than expected tapering. The yields on 10-year US Treasury notes rose 20 basis points during Q3.
Additionally, discontinuation of G-SAP and devolvement of securities on Primary Dealers at weekly bond auctions also weakened investors sentiments leading to a sharp rise in bond yields and decreasing treasury income of most banks.
While volatility in bond yields is likely to keep other income of banks under pressure, lenders are looking to recoup treasury losses via higher credit growth and recoveries. “Other income, it will be growing in the coming quarter also. Whereas the trading income, we presume that it will be at this level only. It will not increase. I think we are expecting to compensate the loss in the trading income through recovery in written-off accounts, through income from other sources and also through interest income. So finally, when we see, there will not be any impact whatever treasury is not giving to the Canara Bank,” said L. V. Prabhakar, managing director and chief executive officer at Canara Bank during a post-October-December earnings call.