Banks to see treasury gains in Q1 as government bond yields soften

Gains limited due to new investment norms

Banks are set to report treasury gains in the April-June quarter as government bond yields softened over the quarter. However, the rise in treasury income  might be limited because of the new investment norm that came into effect from the current financial year starting April 1, said market participants.

The yield on the benchmark 10-year government bond fell by 6 basis points during the period on the back of foreign inflows ahead of JP Morgan bond index inclusion.

While the yield on 5-year government bond softened by 4 basis points. And that on 7-year bond fell by 1 basis points during the April-June period.

“Treasury gains will be there, but due to the new investment guidelines, the investments in the Held For Trading (HFT) category will only give the P&L benefit,” said VRC Reddy, head of treasury at Karur Vysya Bank.

“Gains will be there but it will be limited when compared to the previous year,” he added.  

The revised norms permit banks to categorise their entire bond investment portfolio into three classifications: held-to-maturity, available-for-sale, and fair value through profit and loss. The new regulations integrate the existing sub-category of held-for-trading into the last category.

After transitioning to this framework, banks are not allowed to reclassify investments between categories (viz. HTM, AFS, and FVTPL) without the approval of the boards, as well as from the regulator.

The norms mandated that securities that are classified under the HFT sub-category within FVTPL should be fair valued on a daily basis, whereas other securities in FVTPL will be fair valued at least on a quarterly, if not on a more frequent basis.

Under the new norm, banks must categorise bonds as “held-to-maturity” on a permanent basis, with the exception of 5 per cent of the portfolio that can be withdrawn throughout the year.