Banks book treasury profits in Oct as bond yields slide

Make up for MTM losses in September quarter as yields on 10-yr bonds soften

After suffering losses in their investment portfolio during the July-September quarter, public-sector banks more than made up for their losses by booking profits in October as bond yields fell sharply.

The yields on the most-traded 10-year government bond softened around 23 basis points in October to close at 8.27 per cent on Friday, giving the banks the option to liquidate some securities and book profits. The yields on other papers, such as the six-year and the nine-year ones, also fell 30-40 basis points.

A host of government banks had reported provisions on investment depreciation in their September quarter earnings. Some such lenders were Union Bank of India (Rs 79 crore), Indian Overseas Bank (Rs 113 crore), IDBI Bank (Rs 26 crore), and Andhra Bank (Rs 6 crore). Most of those more than made up for their provisions during October.

"The reduction of 20-22 bps (yields) in a month is quite significant. We have lightened our holding in the available-for-sale and held-for-trading securities, as the yields have come down," said a senior official from Indian Overseas Bank.

There was a concern that even if the Reserve Bank of India (RBI) maintained the status quo on the interest rate in its fifth mid-quarter policy review on December 3, a hawkish tone from it might bring yields under pressure. And, if the central bank decided to lower the rate, yields could come down to eight per cent, bankers said.

"We have booked profits in October itself and that has more than offset our provisioning in the July-September quarter. In case the RBI lowers the rate, yields could come down to eight per cent; such levels could not be sustained, though," said Andhra Bank Chairman & Managing Director C R V Rajendran.

"Once banks have completed their gains in their available-for-sale portfolio, they will start cutting their held-to-maturity portfolio and make gains. The RBI wants banks to cut their HTM portfolio anyway," said a senior treasury official at a public-sector bank. He, however, added that open-market-operation sale of bonds could be announced if the RBI did not want a rate cut expectation to build up. That would correct the bond prices.

Falling inflation, along with a dovish tone from the central bank, which is on course to meet its January 2015 inflation target of eight per cent, has softened the yields on government papers.

"The fixed-income segment is the flavour. Banks are making gains in government bonds and corporate bonds, as well as state development loans. The current quarter is better than the previous two, as well as the December quarter of last year. The treasury gains might continue due to softer inflation numbers and with fiscal deficit under control," said N S Venkatesh, executive director & head of treasury, IDBI Bank.

The rate of retail inflation, the RBI's anchor for its monetary policy stance, stood at 6.46 per cent in September, the lowest since the launch of a new series in January 2012, mainly on account of a softening in food prices. Also, falling global crude oil prices are giving oil marketing companies the headroom to lower petrol and diesel prices. This will have a favourable impact on bringing inflation further down.