BofA-Merrill cuts Bank of Baroda, Union Bank of India

Cites mark-to-market losses in their bond portfolios

Bank of America Merrill Lynch has downgraded public sector lenders Bank of Baroda and Union Bank of India on slowing growth and impact on earnings from mark-to-market losses in their bond portfolios.

Bank of Baroda shares are down 5.22%, while United Bank of India has fallen 4.65%.

Bond yields surged sharply after the central bank began tightening short-term liquidity last month in order to arrest the rupee decline.

State-controlled banks typically hold large portfolios of government securities in the available-for-sale (AFS) category rather than in the held-to-maturity (HTM) category, which means a drop in bond yields has to be recorded as a capital loss on their balance sheets.

The brokerage says it expects MTM losses of at least Rs 3-4 billion for Bank of Baroda, estimating that the lender has an AFS book of 21% of its bond portfolio.

It cut the bank's rating to "neutral" from "buy".

It valued United Bank of India's AFS book at 17% of its bond portfolio, re-rating the stock to "underperform" from "neutral".