PSBS STARE AT R180-200 BN MTM LOSSES IN FIRST QUARTER

If the current situation persists, bond yields may stay above 8 per cent by June, say experts

After the dismal performance reported by many public-sector banks (PSBs), analysts took the view that the worst was over and the stock prices rallied in many cases despite the banks making historic losses. Though brokerages revised their earnings estimates downwards with steep decline in target prices too, stocks of some PSBs, like State Bank of India (SBI), surged by over six per cent immediately post Q4 results in the hope that major stress was over.

While the market may be right in assuming that much of the bad loan stress is reflecting in the stock prices, but, some macro factors don’t seem to be in favour of PSBs. One of them is the rising bond yields, which would damage banks’ bottom line. Besides huge bad loans, high yields also dented the profitability of PSBs, especially operating profits in the past two quarters with higher mark-to-market (MTM) provisions as yields on government securities fell.

PSBs, thus, are likely to see high MTM provisions in the June 2018 quarter (Q1) too. “For every 10 basis point increase in yields, additional MTM losses could be ~30-35 billion,” said Karthik Srinivasan, head-financial sector ratings at ICRA. More than half of this would be for the top five PSBs. If the 60 basis point fall in bond yields since the end of March 2018 is to be considered, PSBs would end up with ~180-200 billion in MTM losses in Q1 (without assuming any dispensation that banks may use in terms of spreading these losses).

Banks are mandated by the Reserve Bank of India to split their investment book of bonds between held to maturity and available for sale (AFS) categories. Bonds in the AFS category need to be valued at market prices, or MTM, and banks need to book profit or loss on these on a quarterly basis. PSBs are major investors of government securities and typically hold a large portion under the AFS category. Top five PSBs, for instance, have between 28 per cent and 40 per cent of their investment books under AFS category.

Yields have been marching northwards since past many months. Bond yields are inversely related to bond prices, so, any rise in yields leads to a fall in the value/price of the bond, and vicea-versa. Yields on the 10-year benchmark government bond rose by 66 basis points to 7.33 per cent in the December 2017 quarter, which further increased to 7.4 per cent in Q4. In the first quarter of FY19, bond yields are already up and were hovering at 7.99 per cent on Monday, a rise of 59 basis points.

Experts say, the uptrend is likely to persist in the near term. “With high crude oil prices and a weak rupee, the bond market may remain under pressure. Given the current levels, we expect yields to exceed eight per cent level by June 2018,” says Srinivasan. Also, a 25 basis point hike in interest rate by the RBI, last Wednesday put further pressure on the bond market.

However, banks will have some recourse as the RBI has allowed banks to spread MTM losses equally over four quarters since the December 2017 quarter. Also, as per experts, banks normally reduce the AFS pool in the month of April. So, to that extend, the MTM losses would be contained in Q1. The exact impact would depend on these factors and whether banks choose to use the dispensation available to them. SBI, for instance, had chosen to provide for all the bond losses in March quarter, while most others hadn’t.