RBI's G-sec purchases under 'operation twist' a comforting factor for PSBs

The fall in 10-year G-Sec yields is estimated to benefit state-owned banks by Rs 5,760 crore; Nifty PSU Bank rises 3%

The Reserve Bank of India’s (RBI’s) move to purchase long-tenure government bonds (G-Sec) under ‘operation twist’ augurs well for public sector banks (PSBs). 

The Nifty PSU Bank index gained about 3 per cent on Friday, following the RBI’s second auction announcement on Thursday evening. 

The Nifty ended up 1 per cent gain on Friday. 

The expected mark-to-market (MTM) gains, on account of lower yields on G-secs, also lift the PSBs’ overall earnings outlook. 

The announcement of Rs 20,000 crore of 10-year G-Sec purchases by the RBI under ‘operation twist’ has, so far, led to a 24-basis-point (bp) fall in 10-year G-Sec yields since Thursday last week to 6.51 per cent (yields down 19 bps in the December quarter).

According to Anil Gupta, head (financial sector ratings) at ICRA: “A 10-basis-point change in G-Sec yields brings an approximate Rs 3,000-crore impact on the market value of G-Secs for PSBs.” 

Thus, if the yields sustain at current levels till December-end, PSBs may see a gain of Rs 5,760 crore on their G-Sec investments in the December quarter.

According to the RBI, banks, on a quarterly basis, are required to account for a change in market prices of bonds, or MTM, held under the available for sale (AFS) category and PSBs have a large chunk of their investment book in G-Secs held under AFS. 

For instance, 52 per cent of State Bank of India’s total AFS book (46 per cent of total investments) as of September 2019, is accounted by G-Sec and T-bills. Some experts believe that the RBI typically prefers a 110-bp spread between long-term G-Sec yields and the repo rate. 

At the current juncture, the yield target for the RBI could be around 6.3 per cent, as the repo rate stands at 5.15 per cent. 

Therefore, one could expect further actions or bond purchases by RBI, and consequently more gains for PSBs. 

While the MTM gains provide comfort — mainly for corporate banks — considering the completion of resolution process of Essar Steel, a large bad loan account and the latest financial stability report of RBI suggest that the bad loan stress may be not over for the sector yet.

Additionally, how the overall bank credit growth pans out amid a sagging economy would be key to watch.  ICRA’s recent report estimates weaker credit growth of 6.5-7 per cent in FY20, compared to 13.3 per cent in FY19.