Dipping value of bonds may hurt private banks

By Saikat Das

MUMBAI: Private banks, which have weathered the economic slowdown in the past few quarters, may also face earnings pressure in the September quarter as a slump in bond prices dents profits.


The surge in yields during the quarter after the Reserve Bank of India raised shortterm interest rates to defend the currency, may hit some lenders such as YES Bank, IndusInd Bank and Axis Bank more than the rest, say analysts.

These private sector banks which do not match the low-cost deposits of lenders such as State Bank of India, or a HDFC Bank, also paid more to borrow funds by selling instruments such as certificates of deposit (CDs) or bonds.

All banks will have to book losses on treasury on hardened yields during the quarter due to the RBI move to increase marginal standing facility ( MSF) rate, a special window for banks to borrow money from RBI, said Saikiran Pulavarthi, an analyst at Espirito Santo Securities.

“Meaningful corporate bond portfolio is there for YES Bank and Axis bank. However, the quantum of losses will be difficult to predict.”

Bond yields jumped as much as 180 basis points during the quarter after RBI on July 15 raised the MSF rate by 2 percentage points to curb speculation in the rupee. Banks which have been trading for nearly six months on expectation that interest rates will move just one way – downwards – were hammered when yields jumped. Bond prices and yields move in opposite direction.