Saturday, June 28, 2008

Declare For Banks Losses Of Up To Rs 1,500 Cr - June 28,2008

MUMBAI: The first quarter of 2008-09 could see banks declare losses of up to Rs 1,500 crore on treasury operations. Nationalised banks are more likely to bear the brunt of rising yields compared with their private sector peers since a few large public sector banks have parked as much as 50-60% of their bond portfolios in the available-for-sale (AFS) category.

As against this, private sector majors such as ICICI Bank, HDFC Bank and Axis Bank have parked only 15-20% of their bond portfolios in the AFS bucket. As per RBI guidelines, banks have to mark-to-market (MTM) a portion of their g-sec book (i.e. 26-30% of assets owing to high SLR), which is in the non-held-to-maturity (HTM) category. Thus, in the current circumstances, banks with a larger share of portfolios in the AFS category (non-HTM bucket), and that too, bonds with a longer duration, will be the most affected. In addition, banks have also to mark-to-market all their non-g-sec investments (like corporate bonds) every quarter.

According to a recent report published by Merrill Lynch, for every 10-basis point rise in yields, banks could incur a loss of up to Rs 250 crore. It may be recalled that the yield on the benchmark paper, the 8.24% bond maturing in 2018, has moved up from 7.90% in March 2008 to over 8.85% in June 2008.

Banks run into losses on their bond portfolios, when bond yields rise sharply. Bond prices fall when yields rise and banks have to mark-to-market the holdings in the AFS category based on the yield prevailing on the last day of the quarter. Recently, the Reserve Bank of India (RBI) hiked the repo rate — rate at which banks borrow from RBI — and the cash reserve ratio by 50 bps each. This has caused yields to move up drastically in the past week of this quarter.

Given that public sector banks have large SLR requirements, most banks would have huge stocks of the benchmark bond, which alone has witnessed a fall of more than 400 paise rise in barely three months time.

State Bank of India, the largest nationalised player, seems to be the worst hit, given the significant exposure to varied classes of securities. The bank has parked up to 80% of its bond holdings in the HTM category, but faces the risk of incurring a loss of more than Rs 350 crore this quarter.

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