Banks try to minimise gilt losses

Banks are devising new strategies to stop their treasury books from bleeding. A key strategy now seems to be buying government securities (G-Sec) directly into the held-to-maturity (HTM) category to avoid periodic marking of the portfolio to the market and, thereby, inviting hefty provisions due to rising interest rates.

“In these uncertain days, banks buying G-Sec will put into HTM and not in trading book,” said V K Khanna, treasurer, Union Bank of India. Hitherto, banks used to keep securities in their trading book to look for opportunities to make trading profits.

But the steady rise in yields and the hefty provisions made thus far this year on portfolio depreciation has prompted these banks to buy gilts directly into the HTM category even though at the cost of trading opportunities.

Gilts portfolio

Banks classify their investment portfolio into three categories: held to maturity, held for trading, and available for sale. The latter two comprise the bank’s trading book and require frequent marking of the portfolio to the market.

And when banks shift their investments from the trading books to the HTM category — allowed only once in a year — they will have to mark these papers to the market and make the required provisions, should the prevailing yields be higher than the levels at which they bought the papers.

Since July, the yield on the 10-year benchmark government bond has risen 28 basis points and was trading at 8.97 per cent today.

In the first quarter of 2008-09, banks had to make huge provisions towards mark-to-market loss following the rise in gilt yields. This hurt their profitability significantly and most banks are now looking to avoiding big investment write-downs this quarter.