After ending at 6.80% in March, the benchmark bond yield had touched a high of 7.50% in June, the highest in more than three years on fears that rising inflation will force the Reserve Bank of India (RBI) to hike rates. It has since eased to end Monday at 7.35%. Banks have to compulsorily invest 18% of their deposits into government bonds known as statutory liquidity ratio (SLR).
Only Canara Bank with a ₹1,849 crore profit and ICICI Bank with a ₹36 crore profit managed to buck the trend.
Mumbai: A surge in bond yields during the quarter ended June 2022 has impacted all large lenders with only two out of eight of the biggest banks escaping making losses. But the saving grace is that yields are unlikely to rise as steeply for the rest of the year, allowing banks to recoup some losses.
After ending at 6.80% in March, the benchmark bond yield had touched a high of 7.50% in June, the highest in more than three years on fears that rising inflation will force the Reserve Bank of India (RBI) to hike rates. It has since eased to end Monday at 7.35%. Banks have to compulsorily invest 18% of their deposits into government bonds known as statutory liquidity ratio (SLR).
Banks had to account for the fall in their bond valuations, resulting in a hit on their treasury income. The impact on State Bank of India (SBI) was the largest as the public sector giant reported a surprise 7% fall in net profit year-on-year due to a huge hit on the market value of the bank's government bond investments.
Net profit fell because the bank booked a Rs 6,549 crore loss on its investments due to the deterioration in value during the quarter.
Only Canara Bank with a Rs 1,849 crore profit and ICICI Bank with a Rs 36 crore profit managed to buck the trend.
Canara's gains were amazing because it was 46% higher than last year. A senior bank official said the gains were because the bank took timely action by selling longer duration securities in early April before yields started rising, which allowed it to reduce its average duration and arrest the decline in value. It also did not take any exposure to longer duration non SLR papers when rates were low.
Analysts, however, said that bulk of the mark-to-market losses are behind us as the bond yields are unlikely to harden abruptly again.
"Most banks would have shifted some proportion of the available for sale (AFS) book into HTM (held to maturity), which the RBI allows once every year. Further, incrementally, banks would classify investments in bonds under HTM to protect the portfolio from further steepening of yield curve," said Nilanjan Karfa, executive director-equity research at Nomura Securities. Banks do not have to mark securities in their HTM portfolio to their present day market value.
Bankers said they do not expect any more pain from their bond investments. "If the 10-year yield stays where it is now at around 7.30%, we will be able to write back Rs 1,900 crore. If it rises to 7.75%, we may have to make another Rs 2,000 crore to Rs 3,000 crore provisions. But with inflation on the way down and currency also strengthening, we do not expect a sharp jump in yields," SBI chairman Dinesh Khara said.
Bank of Baroda CEO Sanjiv Chadha said bond yields had moved up nearly 75 basis points in a single quarter, normally a move done in a full year period.
"But going ahead, the downside seems to be a little limited as compared to what we have seen," Chadha said.
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