Bonds Don’t Pay, Banks Face Dull March Quarter
RBI’s asset quality review and fall in fee income add to key worries
Saloni Shukla & Pratik Bhakta
Mumbai: Banks face a doublewhammy in the March quarter as they take a hit from bond holdings and fee income as digital transactions ease amid increasing cash condition. The last quarter of the fiscal may see them turning in their worst performance since the Reserve Bank of India ordered Asset Quality Review.
Large treasury gains have helped most state-run banks post profits in the December quarter, but with yields rising nearly 40 basis points, the treasury gains of banks are expected to be tepid which may keep them from reporting profits in this quarter.
“Q4 will be another challenging quarter as most of the treasury gains have been wiped out, also no improvement is expected on the credit offtake front; so I think banks may not post some great earnings in the last quarter,” said Siddharth Purohit, senior research analyst at Angel Broking. “Interest costs will also be up because banks are sitting with a lot of deposits and have no place to deploy those funds. I also believe that some game plan should be expected from RBI on what next as most of the bad loan recognition has been done.” G-sec
yields have firmed up about 40 basis points following the Reserve Bank of India’s policy meet and 10-year Gsec, now at 6.9%, is at a higher level than on December 31, 2016. Given significant accumulation of government securities at low yields in the previous quarter, banks may have to take mark-to-market losses on those securities.
“As this magnitude of gains will not be available in 4Q post the recent 40-basis-point rise in yields and added operating profit pressure from marginal cost of funds based lending rate (MCLR) cut, and rise in pensions, many PSUs will be pushed back into losses in 4Q,” said Ashish Gupta, research analyst at Credit Suisse, in a report. Public sector banks, which have booked treasury gains of more than .₹ 12,500 crore, have managed aggregate profits of only .₹ 500 crore. Loan growth for most banks during the third quarter of this fiscal also decelerated sharply, offsetting the benefit of large deposit inflows in current accounts and savings accounts, and drop in funding costs. “Unless banks are able to recover money from troubled assets, Q4 is not looking any better and most of the treasury gains will not be available in this quarter,” said Karthik Srinivasan, vice president, ICRA.