Informist, Wednesday, Mar 22, 2023

By Richard Fargose

MUMBAI – Indian banks, which were staring at mark-to-market losses on their investment portfolios in the March quarter, have received support from an unexpected quarter, with the crisis in the US banking system leading to a correction in bond yields globally.

"Most (bank) treasuries were in the red till Mar 9, but the sudden slump in US yields due to change in Fed rate view was a major positive surprise for us this quarter," said the treasury head at a big state-owned bank. "We were expecting some losses in treasury books, but now we are estimating our (treasury) profits will be at par with the December quarter."

On Tuesday, the yield on the 10-year benchmark 7.26%, 2032 bond settled at 7.35%, down 9 basis points from 7.44% on Mar 9. It was at 7.33% on Dec 30. This, analysts say, will boost the profits of banks for Jan-Mar and help them offset heavy mark-to-market losses incurred on investment books in Apr-Jun.

The adverse impact of hardening of yields was expected to be felt by most Indian banks in Jan-Mar, especially public sector ones, given their higher holdings of government securities.

Banks are mandated to invest a part of their deposits in government securities and treasury bills to meet the statutory liquidity ratio requirement, currently at 18% of net demand and time liabilities. However, the actual holding of SLR-approved securities of banks stands at around 28%, according to latest data from the Reserve Bank of India.

The impact of the movement in yields differs across banks, and depends on the risk management strategies used by banks to hedge interest rate risks in their trading books.

Private banks, which hold nearly 80% investments in securities maturing in up to five years compared to 55% in the case of state-owned banks, were also staring at large mark-to-market losses in their investment portfolios, as short-term yields had risen more steeply than the rest.

After easing slightly in Jul-Dec, the yield on the 10-year benchmark government bond rose 11 bps during Jan 1-Mar 9, while the yield on the five-year benchmark government bond jumped over 20 bps during the same period.

The yield on the five-year benchmark bond eased by 22 bps to 7.22% on Tuesday compared to 7.43% on Mar 9.

The sharp rise in gilt yields in the March quarter was due to hawkish commentary by the RBI's Monetary Policy Committee in its February monetary policy, as well as a higher-than-expected CPI inflation print for January.

Indian banks had reported treasury losses of around 130 bln rupees for Apr-Jun, when the yield on the 10-year benchmark government bond had risen by 61 bps after aggressive interest rate hikes by the RBI to contain inflation. State Bank of India, the country's largest lender, alone reported mark-to-market losses of over 65 bln rupees in the June quarter.

After two quarters of profits from their investment portfolios, banks were staring at such losses again in Jan-Mar. However, the recent failure of banks in the US, including of Silicon Valley Bank and Signature Bank, has changed the outlook on the Fed's interest rate path. The probability of the Fed funds rate peaking at 5.50-5.75% and staying there through 2023 has now swung to a cut of around 100 bps by the end of 2023.

"Repo rate in India may stay higher for slightly longer period depending on inflation trajectory, but yields seem to be near their peak levels in current tightening cycle," said Anil Gupta, senior vice-president and co-group head financial sector ratings at ICRA. Gupta says that despite huge mark-to-market losses in Apr-Jun, most banks are likely to report treasury income for the financial year ending March, as stable yields on government bonds since July will help offset the losses in Apr-Jun. 

The yields on the 10-year and five-year gilts eased by 10 bps and 24 bps, respectively, after cracks in the US banking system came to the fore on Mar 9, resulting in the recovery of almost all mark-to market treasury losses in the ongoing quarter.

Banks report mark-to-market losses based on yields on the last working day of the quarter.

The recent fall in bond yields has not only eased the pressure on banks' earnings for the March quarter, it also holds a silver lining for stable treasury income in the coming financial year, as gilt yields are likely to peak near current levels.  End

Edited by Avishek Dutta

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (22) 6985-4000 

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2023. All rights reserved.

Informist, Wednesday, Mar 22, 2023

By Richard Fargose

MUMBAI – Indian banks, which were staring at mark-to-market losses on their investment portfolios in the March quarter, have received support from an unexpected quarter, with the crisis in the US banking system leading to a correction in bond yields globally.

"Most (bank) treasuries were in the red till Mar 9, but the sudden slump in US yields due to change in Fed rate view was a major positive surprise for us this quarter," said the treasury head at a big state-owned bank. "We were expecting some losses in treasury books, but now we are estimating our (treasury) profits will be at par with the December quarter."

On Tuesday, the yield on the 10-year benchmark 7.26%, 2032 bond settled at 7.35%, down 9 basis points from 7.44% on Mar 9. It was at 7.33% on Dec 30. This, analysts say, will boost the profits of banks for Jan-Mar and help them offset heavy mark-to-market losses incurred on investment books in Apr-Jun.

The adverse impact of hardening of yields was expected to be felt by most Indian banks in Jan-Mar, especially public sector ones, given their higher holdings of government securities.

Banks are mandated to invest a part of their deposits in government securities and treasury bills to meet the statutory liquidity ratio requirement, currently at 18% of net demand and time liabilities. However, the actual holding of SLR-approved securities of banks stands at around 28%, according to latest data from the Reserve Bank of India.

The impact of the movement in yields differs across banks, and depends on the risk management strategies used by banks to hedge interest rate risks in their trading books.

Private banks, which hold nearly 80% investments in securities maturing in up to five years compared to 55% in the case of state-owned banks, were also staring at large mark-to-market losses in their investment portfolios, as short-term yields had risen more steeply than the rest.

After easing slightly in Jul-Dec, the yield on the 10-year benchmark government bond rose 11 bps during Jan 1-Mar 9, while the yield on the five-year benchmark government bond jumped over 20 bps during the same period.

The yield on the five-year benchmark bond eased by 22 bps to 7.22% on Tuesday compared to 7.43% on Mar 9.

The sharp rise in gilt yields in the March quarter was due to hawkish commentary by the RBI's Monetary Policy Committee in its February monetary policy, as well as a higher-than-expected CPI inflation print for January.

Indian banks had reported treasury losses of around 130 bln rupees for Apr-Jun, when the yield on the 10-year benchmark government bond had risen by 61 bps after aggressive interest rate hikes by the RBI to contain inflation. State Bank of India, the country's largest lender, alone reported mark-to-market losses of over 65 bln rupees in the June quarter.

After two quarters of profits from their investment portfolios, banks were staring at such losses again in Jan-Mar. However, the recent failure of banks in the US, including of Silicon Valley Bank and Signature Bank, has changed the outlook on the Fed's interest rate path. The probability of the Fed funds rate peaking at 5.50-5.75% and staying there through 2023 has now swung to a cut of around 100 bps by the end of 2023.

"Repo rate in India may stay higher for slightly longer period depending on inflation trajectory, but yields seem to be near their peak levels in current tightening cycle," said Anil Gupta, senior vice-president and co-group head financial sector ratings at ICRA. Gupta says that despite huge mark-to-market losses in Apr-Jun, most banks are likely to report treasury income for the financial year ending March, as stable yields on government bonds since July will help offset the losses in Apr-Jun. 

The yields on the 10-year and five-year gilts eased by 10 bps and 24 bps, respectively, after cracks in the US banking system came to the fore on Mar 9, resulting in the recovery of almost all mark-to market treasury losses in the ongoing quarter.

Banks report mark-to-market losses based on yields on the last working day of the quarter.

The recent fall in bond yields has not only eased the pressure on banks' earnings for the March quarter, it also holds a silver lining for stable treasury income in the coming financial year, as gilt yields are likely to peak near current levels.  End

Edited by Avishek Dutta

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (22) 6985-4000 

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2023. All rights reserved.