Rising bond yields to hit banks dearly

Mumbai: A report by India Ratings also said public sector banks would continue to report losses for this fiscal.

Banks collectively had reported a gain on treasury of Rs 59,800 crore in FY17.

The 10-year benchmark yield has moved up to 7.60 % in January, up from 6.50% as on July 2017, up 110 basis points.

According to the India Ratings, large losses emanating out of the quick rise in bond yields, especially in the past six weeks, will result in large mark-to-market losses on lenders’ non held-to-maturity investment holdings.

“This will lead to a considerable fall in the banks’ treasury income in the March quarter, with a spillover effect in FY19. We expect banks’ profitability to be affected to the tune of Rs 30,500 crore in FY18, with return on assets of around 30 basis points,” the report warned.

According to the agency, mid-sized banks would be the worst hit, considering their proportionally swollen treasury books, after a period of muted credit and large deposit growth, and a steeper treasury profit booking in FY17.

Out of the total potential loss, the share of state- run banks will be Rs 24,800 crore in FY18, while that of the private sector banks will be Rs 5,700 crore, the report said.

“The resulting treasury loss will impact the renewed vigour post announcement of bank recapitalisation,” it said.

The report also expects the additional burden emanating from migrations to the new accounting standards, Ind AS, and step-up in provisioning due to faster resolution of stressed assets to further dent banks’ profitability.

The agency feels scheduled commercial banks may need up to Rs 89,000 crore towards incremental provisioning for advances, while transiting to the Ind-AS 109 regime.