Sinking bond yields likely to ease banks' stress

The sustained rally in Indian bond prices has offered bankers a reason to celebrate. They, specially public sector ones, are expected to make hefty profits from treasury operations in the current (October-December) quarter, as bond yields continue to fall on hopes of a policy rate cut early next year. On Thursday, the benchmark 10-year government bond yield dipped below 7.88 per cent intra-day, the lowest since July 15 last year.

Analysts believe many state-run banks will be tempted to cash this opportunity and book treasury profits, to cushion the impact of slow interest income growth on earnings. For some quarters, interest income growth has been slowing. Loan growth moderated to 10 per cent in the September quarter. Treasury profits will also help banks make up for the deficit provisions for non-performing assets and employee pensions Free Stock Share Tips

“Banks having a higher proportion of securities in the AFS (available-for-sale) category will benefit most. We expect these to report 15-17 per cent rise in profit before tax if they choose to book the entire gains in this quarter itself,” Nitin Kumar, an analyst with brokerage Prabhudas Lilladher, said. He expects lenders like Canara Bank, Punjab National Bank and Oriental Bank of Commerce to report healthy gains in treasury operations.

However, such gains will not necessarily translate to improved net profit. The declining bond yields provide a good opportunity for public sector banks to cover their provision deficits,” said an analyst with an investment bank. Also, not all bankers are willing to book capital gains by selling securities in this current quarter. Many prefer to wait, as bond yields are expected to fall further Intraday Trading Tips

“The decision will vary from bank to bank and depend on the level of stress and urgency to improve provision coverage, etc,” said an executive in charge of treasury operations at a mid-sized private bank.

But bankers admit even if they don't sell securities, the stress on earnings will ease, as almost all are expected to see a reversal in mark-to-market (MTM), revaluing  at current price provisions on investment in government securities. It is almost certain banks will have near-zero provisions for investment in government securities. Provisions on MTM losses will be reversed, helping earnings Jackpot Trading Tips