Spike in bond yields: Treasury losses to hurt banks’ income, profitability in Q1

Treasury losses could hurt banks’ earnings for the quarter ended June and erode operating profits by up to 25% on a year-on-year basis, according to analysts tracking the sector.

Banks, especially those in the public sector, are set to book mark-to-market (MTM) losses on their securities portfolios in the first quarter of FY23 as a result of a spike in bond yields. While public sector banks (PSBs) have requested the Reserve Bank of India (RBI) to let them spread the required provisioning against such losses through the four quarters of the current fiscal, the regulator is yet to accede to the request.

Even as lenders book treasury losses, the outlook is not altogether dim for them. Kotak Institutional Equities (KIE) said in a report on Thursday that strong loan growth, healthy recovery in net interest income and a sharp decline in loan-loss provisions would be key positives.

“The treasury losses even if it is a high number, caused by 150-bps (basis points) increase in short-term interest rates during the quarter, should not be too worrisome as it is not a credit risk for banks. Banks partly offset this loss by a higher interest income on their investment portfolio over time,” analysts at KIE said.

A firm trend in loan growth, as evidenced by the double-digit non-food credit growth prints throughout the quarter, is expected to be a significant positive. Motilal Oswal Financial Services (MOFSL) said the disbursement growth across several retail products has surpassed pre-Covid levels, while corporate growth has been led by improved utilisation levels and working capital requirements.

“While an uncertain macro and rising inflation can impact the demand environment, we estimate loans to grow by 12%/13.5% YoY in FY23/FY24,” MOFSL analysts said.

The turn in the rate cycle, initiated with the RBI’s 40-bps rate hike in May and accelerated by a 50-bps hike in June, will affect bank margins differentially. ICICI Securities said the impact on net interest margins could be relatively more adverse for RBL Bank, IDFC First Bank, IndusInd Bank and Kotak Mahindra Bank. State Bank of India and Axis Bank could be impacted favourably. HDFC Bank, IndusInd Bank and RBL Bank have 45-50% of their loan portfolio on fixed rates, and the rise in deposit rates may outweigh lending rate increases in their cases.

“Retail term deposit rates have risen across the board but not commensurate with repo hike. Wholesale term deposit rates have witnessed the sharpest spike of 100-170 bps in the one-year bucket,” ICICI Securities said in a report on Thursday. The 50-bps hike in the cash reserve ratio will hit NIMs only marginally due to the presence of excess liquidity, the brokerage added.

Analysts expect the asset quality to improve, going by a strong upgrades-to-downgrades ratio in the corporate sector and lower bounce rates on debit requests made through the National Automated Clearing House channel. However, they will closely watch banks’ commentary on repayment trends in their restructured and emergency credit line guarantee scheme (ECLGS) portfolios, which have now started to emerge from their moratoria.

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