State-owned banks likely to see lower gains in bond book in FY22: Icra

Limited headroom for yields to decline further, says rating agency

Public sector Banks, which reaped windfall treasury gains in FY21, are likely to see much lower gains in their bond portfolios in FY22 due to limited headroom for yields to decline further, according to Icra.

The rating agency said public sector banks in India reported net profits in FY21 after five straight years of losses, supported by windfall treasury gains. PSBs booked profits of Rs 31,600 crore from this source compared to overall profit Before Tax (PBT) of Rs 45,900 crore in FY21.

They recorded higher gains on the back of higher Statutory Liquidity Ratio (SLR) holdings than private banks.

Notably, the trading gains for public banks in FY21 exceeded the capital infusion of Rs 20,000 crore received from the Government of India (GoI).

The onset of Covid-19 resulted in windfall gains for public banks with trading profits on their bond portfolios rising sharply after the steep cut in policy rates by the Reserve Bank of India (RBI) in March 2020.

With the rate cuts and abundant liquidity, the daily average for the benchmark 10-year Government securities declined from 6.42 per cent in Q4FY20 to six per cent in Q1FY21. They shed another 5.93 per cent in Q2FY21 and 5.9 per cent in Q3FY21 before rising to 6.06 per cent in Q4 FY21. The significant volatility in bond yields also provided banks with ample trading opportunities, Icra added.
 

Anil Gupta, Vice President-Financial Sector Ratings said banks make windfall profits amid the declining yield scenario, but they could face challenges in their bond portfolios in a rising interest rate regime.

While the RBI is unlikely to be in a rush to hike interest rates in the near term, banks would need to be mindful as treasury profits would be relatively muted in FY2022, Gupta said.

As the banks booked gains on their bond holdings, their fresh investments are closer to the market rates, thereby aligning the yield on their bond portfolios closer to the market rates. The yield on the investment book for the public banks declined to 6.18 per cent in Q4FY21 from 6.79 per cent in Q4FY20.

Moreover, as the scope for further rate cuts is limited with a possible reversal of the policy stance after January 2022, the incremental gains could be modest in FY22, it added.