High bond yields may not hit bank profits

Despite the hardening of yields on government paper in the fourth quarter, bank treasury profits are unlikely to be hit hard for the financial year 2008-09, partly due to purchase of government bonds by Reserve Bank of India (RBI) through open market operations (OMOs).

Dealers said the yields in the G-Sec market eased on account of the financial year drawing to a close. Yet, the large borrowing programme for 2009-10 continues to remain a concern for the market.

The benchmark 6.05 per cent 2019 closed with a yield of 7.01 per cent. The turnover on Negotiated Dealing system stood at Rs 3,935 crore. The top-traded securities on NDS Order Matching System were 6.05 per cent 2019 and 7.46 per cent 2017 with a turnover of Rs 1,955 crore and Rs 285 crore respectively.

Yields have hardened considerably in the fourth quarter, especially at the long end of the yield curve. This was triggered by concerns that the large fiscal deficit expected in 2009-10 and the consequently large market borrowing programme by the government would lead to an excess supply of government paper and also crowd out the private sector

Referring to the impact of rising yields on bank treasury profits, a senior treasury official with Bank of India said that the yields on the bonds have closed higher on the last day of the financial year compared to third quarter (December 31, 2008). Because of this, the provisions for the depreciation may be more and, as a consequence, treasury profits may be lower.

Though the yields have closed higher at the end of March (7.01 per cent) for 10-year paper compared to the end of December 2008 (5.25 per cent), the impact would not be high on treasury profits. Many public sector banks had picked up 10-year paper when the yield was above 6 per cent, IDBI Gilts Managing Director N S Venkatesh said. The yield on 10-year bond at close of March 2008 was 7.94 per cent.

The market has faced pressure from huge paper supply, raising concerns whether the liquidity in the system is adequate or not. This had pushed the yields up despite the RBI’s rate-cut action in March. Besides unwinding Market Stabilisation Scheme (MSS) bonds, the RBI began buying securities through OMOs to infuse liquidity.

A State Bank of India official said that OMO operations have given room to banks to offload securities at higher prices (lower yields) than the level at which they had bought them before. This would help to soften the blow of hardening yields.

The entire bond portfolio is not impacted by the hardening of yields. Only those securities which are available for sale would see an impact as they are marked to market. The portfolio which is held to maturity will not be marked to market for valuation. Fixed Income Money Market and Derivatives Association of India (FIMMDA) is expected to announce details about calculating the impact on Thursday. Only then will a clear picture of each bank’s portfolio emerge.

Head of treasury with a Kolkata-based public sector bank said that the huge borrowings programme kept the yields on bonds high in March. This may have an adverse effect on the bond portfolio and a provision would have to be made for depreciation.

Another aspect that would have a bearing on treasury profits is the scope for booking profits. The yields have remained high in March even after RBI rate-cut action. As a consequence, the opportunity for making good profits through sale was limited, said a dealer with public sector bank.

The government has decided not to transfer Rs 33,000 crore from Market Stabilisation Scheme (MSS) account to normal cash account with Reserve Bank of India. It had to decided to unwind MSS bonds worth Rs 45,000 crore by the end of march to infuse liquidity. It has only unwound bonds worth

Rs 12,000 crore. The cash position with government remains confortable and it would unwind MSS bonds for Rs 33,000 crore in 2009-10. The MSS outstanding as on March 31, 2009 is Rs.88,773 crore.