PSBs may net higher profit on softening G-Sec yield in Q1:Icra

As per Icra, the fall in G-Sec yield has prompted a sharp increase in trading volumes, which is an indicator of the churn in investment portfolio, which will help shore up the profitability indicators.

Despite persistent pressure on credit quality resulting in higher provisions, public sector banks (PSBs) are likely to boost their profitability in the current quarter on softening sovereign yield curve, says an Icra report.

"While asset quality pressures are likely to keep credit provisions high, decline in the sovereign yield curve, as witnessed during April and May, could boost PSBs profitability in the current quarter," the rating agency said.

Yields on the benchmark 10-year government securities (G-Secs) declined by around 60 basis points (0.6%) in the first two months of the fiscal.

As per the rating agency, the fall in G-Sec yield has prompted a sharp increase in trading volumes, which is an indicator of the churn in investment portfolio, which will help shore up the profitability indicators.

The agency also estimates that profit on sale of investments and reversal of depreciation on investments may be Rs 5,000-7,000 crore or around 25% of pre-tax profit in the first quarter on the back of the decline in the yields coupled with higher volumes.

It, however, noted that profit on sale of investments and reversal of depreciation could be moderate in the remaining quarters due to a likely drop in yields.

According to the rating agency, profit on sale of investment plus depreciation reversal could be in the range of 15-20 basis points of average total assets in 2013-14 compared to 14 bps last fiscal.

It also noted that higher trading profit would be critical for banks to negate the impact of higher credit provisions or absorbing the impact of wage hike in the current financial year.