Banks-Grappling With Bond Yields. Was Friday A NAV based Rally?

Banks may take a hit on investment portfolios

Double whammy of lower bond prices, falling equity

Priya Nair
Radhika Menon

 

Mumbai, March 29 Most banks are likely to take a hit on their investment portfolio, in the fourth quarter, due to depreciation in the value of government securities and equities, say analysts.

 

The yields on the most actively traded securities have fallen by around 10-25 basis points over the last three months.

 

At the end of December 2007, the yield on the 10-year Government Security was 7.79 per cent, while as on March 28, 2008, it had gone up to 7.91 per cent. Similarly, the yield on the 28-year G-Sec has gone up from 8.12 per cent to 8.38 per cent.

 

"There will be an adverse impact for banks that have G-Secs in their HFT (held for trading) portfolio as it is marked to market. Also, nobody expected inflation to be skewed to this extent," said Mr N.S. Venkatesh, Managing Director and CEO, IDBI Gilts Ltd.

 

"Those banks that have a huge holding of the actively traded securities may take a bigger hit, as these have depreciated more," said a senior bank official. Most banks have around 30 per cent of the G-Sec portfolio in the HFT and AFS (allowed for sale) category.

 

Fixed Income, Money Markets and Derivatives Association (FIMMDA) would be declaring the yield-to-maturity for the year ended March 31, 2008, on April 1.

 

Participants anxious

 

 

Market participants are particularly anxious since this would come just a couple of days after bond prices saw a rout due to higher inflation figures. Many bankers expect yield on the benchmark paper to touch 8.05 per cent, given the high inflation and oil prices.

 

The fear among bankers is that if the yields are higher than the December levels, they would have to make additional provision. A senior treasury official of a leading public sector bank said, "Yields have hardened by 30 basis points in the last quarter. So, it will have an impact on the HFT and AFS portfolio. Even the equity portfolio is likely to be hit and there may be a reduction."

 

However, some bank officials feel the impact may not be much, as the AFS portfolio has been accumulated by banks over several months and years. "As most banks do not hold much in the trading portfolio, the impact would be marginal.

 

Yields have really hardened since the inflation figures have been released. Overall, 2007-08 has been a better year because interest rates have been by and large consistent. Inflation until now has also been more under control this year," said an official with a private sector bank.

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.