Banks await Rs 15000-cr MTM loss on surging bond yields:Report

Mumbai, Jan 3 (PTI) Continuing surge in the benchmarkbond yields, which rose as much as 67 bps in Q3, will leavebanks with a big hole in their treasury portfolios and resultin mark-to-market (MTM) losses of Rs 15,500 crore for theDecember quarter alone, warns a report.As much as 80 per cent of this over Rs 15,000-croredent are slated to be absorbed by state-run lenders, furthereroding their core capital, and government may have to reworkits recapitalisation math because of it.In the H1 of FY18, state-run banks had a pre-tax lossof Rs 5,624 crore and 80 per cent of the projected loss of Rs15,000 crore will be borne by them, says an Icra report.Banks had booked a whopping Rs 1 trillion profitbetween the six quarters ending Q2 of FY18 following a steadydecline in bond yields after RBI cut interest rates.Concerns over higher fiscal deficit for FY18, whereingovernment has used 112 per cent of fiscal deficit target byNovember itself, has had the bond yields on fire for quitesome time. This had the average Q3 yields at 7.33 per cent andpeaked at 7.4 per cent in the last week of December."The 67 bps surge in yields on the 10-year governmentsecurity in Q3 on the back of higher-than-budgeted fiscaldeficit, is likely to result in MTM losses to banks on theirinvestment portfolios in Q3 to the tune of Rs 15,000 crore forthe system," Icra said in note.According to the agency, this is because banks havemuch lower cushion to absorb interest rate shocks, followingthe recent surge in bond yields on the available for saleportion of their G-Secs portfolio, the reprot said.As of Q2, public sector banks had a larger share ofthe AFS book with longer duration compared to their privatesector peers,accordingly,they are likely to account for 80 percent of overall MTM losses of Rs 15,000 crore, he said.This comes on back of the state-run banks making pre-tax losses of Rs 5,624 crore in H1, and this projected MTMlosses will further erode their capital ratios. In contrast,private sector players are relatively better placed to absorbthe MTM losses with pre-tax profit of Rs 30,994 crore duringthe same period.It also said with this unexpected surge in yields andresultant losses, government may have to increase the capitalit intends to frontload into the banks through recap bonds.It can be noted that the steady decline in bond yieldshad resulted in windfall profits for banks, especially in thesix quarters between Q4 of FY16 and Q2 of FY18, when banksbooked a whopping Rs 1 trillion from treasury gain, muchhigher than their total pre-profit of Rs 51,105 crore.While a part of treasury gains were also due to saleof non-core assets by banks given the profitability pressures,however the same is estimated to be under Rs 20,000 crore inoverall treasury gains, which means that a large share of thegains is coming from their bond portfolios.Of this Rs 1-trillion treasury gains, state-run bankshad booked 74 per cent of or Rs 74,300 crore, thanks to theirexcess G-sec holdings. But, despite these sizeable gains, theyreported pre-tax losses of Rs 48,020 crore during the period.As banks gradually booked profits on their investmentportfolios, yields on their investments declined to 7 per centin Q2 from 7.9 per cent in Q4 of FY16, reducing the cushion toabsorb MTM losses against adverse interest rate movements.Decline in 10-year G-sec yields during Q4 of TY16 andQ2 of FY18 was supported by improved fiscal conditions andyields bottomed out at 6.2 per cent in Q3 of FY17 due to thesurplus liquidity from note-ban.Bond yields were but continued to remain below 7 per cent in H1. But, with the rise in crude prices and concerns on fiscal slippages, yields started to harden from September and continued throughout the December quarter and touched 7.4 per cent in the last week of December.

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