Banks’ Q4 net may dip on lower treasury gains

NEW DELHI: Banks are bracing themselves for a fall in fourthquarter profits despite the latest interest rate cut, as continuing heavy borrowing by the government has kept bond yields firm and could depress gains from treasury operations, bankers say.

Government bond prices typically rally after every rate cut announcement , but even after last Wednesday���s 50 basis points (one basis point is one hundredth of a percentage point) cut in interest rates by the central bank, yields on government bonds maturing in 2018 ��� the bond market benchmark ��� hover around 6.5%.

���This (firm bond yields) would hurt. In the current quarter, hardening government bond yields would certainly impact trading profits and profits from sale,��� said Vijaya Bank chairman and managing director Albert Tauro. Yes Bank chief economist Shubhada Rao said the 50 basis point rate cut would not be sufficient to counter market concerns about an oversupply of bonds. ���Supply concerns will keep yields firm for the rest of the month and chances of another rate cut in March is slim,��� she said.

Prices and yields of bonds have an inverse relationship , and firm yields could saddle banks with mark-tomarket losses on their portfolio of government bonds. Most banks do mark-to-market accounting, making provisions for losses or profits at end of each quarter, based on the difference between bonds��� market prices and purchase prices, on a quarterly basis.
Bankers expect the yield on bonds maturing

in 2018 to be around 6.25% on March 31, one percentage point above 5.25% closing in December quarter, forcing them to post losses in their books. In case of 10-year bonds, prices fall by 7 paise for every basis point rise in yields. So, considering that yields at the end of this quarter are close to 100 bps above last quarter���s levels, banks will have to book a loss of Rs 7 for every Rs 100, or Rs 7 crore on an exposure of Rs 100 crore.

The yield on the 2018 bond eased to an all-time low 4.86% during the quarter, before higher government borrowing lifted it to 6.5%. The Centre , hit by falling tax receipts in a slowing economy, plans to borrow Rs 32,000 crore in March alone, taking total borrowings for the year to Rs 3,06,000 crore, up 126% on the Rs 1,35,000 crore, budgeted at the start of the year. For the next fiscal, it has set itself a borrowing target of Rs 3,62,000 crore, up 18% on the current year, which is expected to keep yields high until more rate cuts happen.