ICRA estimates MTM loss of Rs 155 billion for banks

Rating agency ICRA estimated that the year end surge in bond yields would cost the banking sector nominal losses of about Rs 155 billion.

Banks need to value their trading portfolio in sync with the market rate, as such any fall in price have to be factored in the books. In the third quarter ended in December, the 10-year bond yields rose 67 basis points, as the government announced an extra borrowing programme.

The 10-year yields closed at 7.33 per cent at the end of the December quarter.

“With reduced cushion to absorb interest rate movements, the recent surge in bond yields is expected to result in MTM losses on the Available for Sale (AFS) portion of their investment portfolio. The MTM loss for the entire banking sector is estimated at Rs 155 billion during the quarter,” ICRA said in a statement.

According to Karthik Srinivasan, Group Head, Financial Sector Ratings at ICRA, pubic sector banks would account for 80 per cent of this loss considering their available for sale portfolio is the highest in the banking system. 

“With losses before tax of Rs 56.24 billion during H1FY2018, MTM losses will further add to losses and erode capital ratios for PSBs. In contrast, PVBs are relatively better placed to absorb the MTM losses with profit before tax of Rs. 30,994 crore during H1FY2018. With unexpected surge in yields on consequent increase in losses, the GoI may need to increase the capital it intends to frontload into the PSBs by recapitalisation bonds,” Srinivasan said.
 

The steady decline in bond yields in the past six months, between the fourth quarter of fiscal 2016-17 and the second quarter of 2017-18 meant bank treasuries reap profits of about Rs 1 lakh crore, which was much higher than the total profit before tax (PBT) of Rs. 51,105 crore for the entire banking sector during this period.