Bond Rally Q2 . can boost bank income

Banks, which had taken a sharp hit due to mark-to-market losses on their investments in government securities in the June quarter, will be able to write back some of their losses if the yield on 10-year government bonds continues. Current level at the end of the month.

The benchmark 10-year government bond closed at 7.45% at the end of June, but fell to 7.22% as of Thursday. This comes despite a 50 basis points hike by the Reserve Bank of India in July and August and consumer price inflation touching 7% in August.

Last week, the 10-year yield fell to its lowest level since April 25 at 7.08% following news that JP Morgan was in talks with leading investors to include India in the GBI-EM Global Diversified Index . Separately, a fall below $90 a barrel in crude oil also helped support bond prices. There is an inverse relationship between the yield and the price of a bond, meaning that as bond prices rise, yields fall and vice versa.

With 15 days remaining for the end of the second quarter, bankers expect the yield to be capped at 7.3% at the end of September this month after the Reserve Bank of India’s rate-setting panel considers a possible rate hike.

“Yields have come down despite inflation data. Yield should have been faster. Instead, it has come down by 5-6 bps. All the banks have provided a hefty amount in the June quarter at 7.45%. Today the yield is around the level of 7.17%. Soma Shankar Prasad, managing director and chief executive of UCO Bank, said that if it continues like this till September 30, there will be a good amount of write-backs for banks, which will add to the profits.

The rise in bond yields has impacted operating profit of most banks including HDFC Bank, Axis Bank, Kotak Mahindra Bank and State Bank of India.

A 90 basis points hike in the repo rate in May and June, followed by other measures aimed at easing liquidity, led to a sharp rise in yields during the June quarter. In the three months to June 30, the benchmark 10-year government bond yield rose 59 basis points to 7.45%.

Banks are required to mark up securities at their prices on a large portion of their bond portfolios in the available sale (AFS) and hold-for-trading (HFT) books every quarter to account for changes in the prices of their bond holdings. ,

“The Indian bond market has of late pulled out of the US bond market due to low crude oil prices and news of its inclusion in the global bond index. If crude prices and USD-INR remain favourable, the treasuries of banks are expected to withdraw profits and provisions in this quarter,” said Gopal Tripathi, Head of Treasury, Jana Small Finance Bank.

Bankers are increasing the interest rate by 35-50 basis points later this month, taking the policy rate to 5.9%.

However, he believes that the RBI will take careful steps not to affect the pace of growth.

The economy grew 13.5 per cent in the June quarter, slower than the RBI’s estimate of 16.2%.

However, bank credit growth in the last two fortnights has been strong at 15.5 per cent compared to a year ago, supporting the profitability of banks.

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