After spending most of the financial year staring at rising loan defaults and an uncomfortable lending climate, Indian banks finally have something to cheer this quarter.
Falling gilt prices will allow banks to write back earlier provisions, boosting profits
MUMBAI: After spending most of the financial year staring at rising loan defaults and an uncomfortable lending climate, Indian banks finally have something to cheer this quarter.
The sharp fall in government bond yields (and corresponding rise in their prices) from peak levels in the quarter ending September will allow banks to bring back the money kept aside for potential losses from bond sales in its profit and loss account.
For example, the yield on the 10-year benchmark 8.24% 2018 bond has fallen to
6.84% from 8.64% in the end of September.
This means banks can look forward to a solid December quarter because of increased profits from such ‘write backs.’
Public sector banks are expected to benefit the most, because of their high investments in government bonds (gilts), particularly in the available for sale (AFS) category. That’s because for bonds in AFS, banks have to keep aside money if their value drops below their purchase price.
Two of the largest public sector banks, State Bank of India (SBI) and Punjab National Bank (PNB) are likely to benefit, because of the sheer size of their investments.
Both have thousands of crores of gilt holdings, through exact numbers have not been revealed. An analyst with a Mumbai-based brokerage who requested anonymity, said the gilt investments of PNB are around Rs 60,000 crore, while SBI would have invested approximately Rs 1,20,000 crore.
These investments range from tenure of 1 year to 20 years, and also include bonds issued by the government specifically to the banks. “SBI got bonds from the government instead of cash during their follow-on issue last year. They were also given bonds for the farm loan waiver and fertiliser subsidies by the government. Though they had to provide for these from their noses over the year, now that the cycle has changed they may be holding a gold mine,” the analyst said. Smaller public banks like Union Bank and Oriental Bank of Commerce, which had a large amount of AFS bonds, may also cash a large booty.
Vaibhav Agarwal, banking analyst with Angel Broking, said these banks had 33% and 30% of their gilt investments in the AFS category. Bonds held in the AFS category are mostly in the 1 to 5-year tenure, the yield for which has come off a peak of just above 9% to around 7.5% (see table).
Agarwal said this 1.5% drop in the bond yields will directly benefit the banks. “Union Bank had provided Rs 340 crore in the first quarter. OBC had Rs 147 crore as provisions, while PNB had Rs 151 crore provision, these banks can now write back that amount,” he said. Among private banks, ICICI is also likely to benefit from the write back.
But analysts say government banks have an advantage, because having been around for so long, they can also shift bonds into AFS and declare profits.
“When the going is good, public banks have been know to shift bonds from HTM (held to maturity) to AFS which helps them show more profits and hence better capital adequacy, which means they have more capital to lend,” an analyst said.
r_joel@dnaindia.net
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