Most banks likely to write down value of bond portfolios

With yields on government bonds closing higher at the end of March over the third quarter (December 2009), most banks are expected to book losses on their government bond portfolio, putting pressure on their bottom line.

The yield on 10-year benchmark paper (6.35 per cent government paper maturing in 2020) was 7.85 per cent at the end of trading hours, as against 7.79 per cent at yesterday’s close, according to Clearing Corporation of India data.

The yield on benchmark paper had closed at 7.59 per cent at the end of December 2009.

Bankers said the higher yields were a reaction to the sharp rise in inflation and a 25-basis point rise in short-term policy rates by the Reserve Bank of India. Banks had factored in this “event” (taking a hit on treasury operations).

State Bank of India is expected to take a hit of Rs 150-160 crore on account of erosion in value of bonds. This is provision made out of profits. The provisions remain on the books, so it is not an actual loss, said a senior SBI official.

The extent of impact would differ from bank to bank. B A Prabhakar, executive director with Bank of India, said those banks with a large Available for Sale portfolio may see higher provisioning. The extent of impact would depend on valuations set by the Fixed Income Money Market and Derivatives Association of India.

The rate of wholesale price inflation quickened to 9.89 percent in February, the highest in 16 months.

Monetary tightening by RBI and the pressure of a higher government borrowing programme are expected to push yields further up in the first quarter. The government plans to borrow Rs 287,000 crore in April-September 2010.

Dealers said the benchmark yield could cross eight per cent mark and could be at 8.25 per cent in April-May. The central bank will raise benchmark policy rates by 150 basis points in the new financial year. The cash reserve ratio, the proportion of deposits that banks should keep with the central bank, may also be raised by 100 basis points.

The yield on the 10-year notes may rise as much as 65 basis points to 8.5 per cent by June, according to a research report by JPMorgan. That would be the highest level for a benchmark bond of that maturity since September 2008.

HDFC Bank, in a note, said the average maturity of bond issuance is lower than in the first half of last year and could make the for easier absorption of the supply by the market. There could be more upward pressure on yields at the shorter end of the curve than at the 10-year tenure.