Consolidation of public sector banks may boost sentiment in the near term

Lower MTM provisioning already making these lenders attractive

Friday’s announcement on consolidation of public sector banks (PSBs)  has come as a shot in the arm for the sector. State-owned banks will continue to benefit from lower yields on government bonds (G-Secs). Yields on G-Secs have slid a further 32 basis points (bps) to 6.56 per cent as of August 2019, after having dropped 47 bps sequentially to 6.88 per cent in the June 2019 quarter (Q1).

According to the RBI, banks have to account for a change in market value (referred to as MTM) of G-Secs held in the available for sale (AFS) basket on a sequential basis. PSBs are the major investors in G-Secs.

Bond prices are inversely related to yields. Therefore, a decline in yields means higher bond prices. Dhaval Dala, chief investment officer (fixed income), Edelweiss Asset Management, expects yields on the benchmark 10-year G-Sec to trend at the 6 per cent-level in the medium term. 

Slowing economic growth will push the central bank to focus on reducing real rates. That said, prospects of a government stimulus package, as well as currency and interest rate movements in the global markets, could impact domestic sentiment in the near term. Even if yields of G-Secs sustain at the current level at the end of the September quarter, PSBs could, overall,  witness over Rs 8,000 crore in MTM gains, estimate analysts.

According to Anil Gupta, head (financial sector ratings), ICRA, a 10-bp change in G-Sec yields translates to around Rs 2,600-crore in MTM impact for PSBs. In Q1, an aggregate MTM gain of Rs 1,323 crore for the top five PSBs (excluding Canara Bank) lifted their aggregate net profit by 67 per cent.

The actual MTM impact, however, varied from bank to bank, depending on the size of their respective AFS book and tenure of investments (higher the tenure, higher the MTM gains). For instance, State Bank of India, which had 41.7 per cent of its Rs 9.5-trillion investment book under AFS as of June, emerged the major beneficiary with Rs 1,225 crore of MTM gains.

Though Bank of India had to provide Rs 121 crore towards MTM, the provisioning on account of MTM loss was down 31 per cent on a sequential basis and a sharp 69 per cent on a year-on-year basis. However, the near-term business impact on account of merger the process and non-corporate and new corporate slippages, are key factors to keep an eye out for.