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.

Mid-Cap IT-Wallopped (HBL)

IT hiring slowing down

30-60% drop seen as cos await clarity on customer needs

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Changing times

Cos cautious as slowdown in US spells uncertainty.

Recruitment firms anticipate muted salary hikes,

Lateral hires hardest hit; employers 'trimming tail'.

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Moumita Bakshi Chatterjee

 

New Delhi, March 29 There has been a distinct decline in IT recruitments in India this year, mainly on account of the expected slowdown in its largest market - the United States.

 

According to leading recruitment firms that Business Line spoke to, IT companies in India, especially smaller ones, are treading with caution and overall recruitments are expected to see a drop of 30-60 per cent this year, compared to last year.

 

"There is a definite slowdown in hiring and this is reflecting in the appointment ads by IT companies. The Banking and Financial Services clients are getting conscious about their spending on development of new software and solutions, and the focus is now on maintenance of existing systems.

 

Both Indian service providers and MNCs are going slow on recruitments -- smaller ones are particularly affected," Mr Kris Lakshmikanth, CEO & Managing Director, Head Hunters India, said.

 

Postponing entry

 

In this scenario, many IT companies which had doled out lucrative campus offers last year are actually looking at postponing the entry dates of the new recruits, he added.

The recruitment firms are also anticipating muted salary hikes.

 

Compared to last year when the average pay-packets rose 13-14 per cent, this year the increase may only be about 7-8 per cent, they say.

 

"Overall, the recruitments are likely to be 30-40 per cent lower this year. The recruitment of lateral hires has been hit the hardest; but fresh recruitments and campus hirings too are seeing a slowdown," Mr Vishal Chhiber, HR Head of Kelly Services India, pointed out.

 

According to TeamLease Services, a staffing company, while firms generally tend to reduce the pace of hiring around November-December (as US customers close the year), the recruitment drive gathers momentum in the first half of a year.

 

"But this year we have not seen that happening. The rate of recruitment has come down by about 60 per cent as opposed to last year. We had expected things to look up in March-April timeframe, but there is no clarity from our customers yet," Mr Sampath Shetty, Vice-President, TeamLease Services, said.

 

Utilisation rates

 

IT companies are also busy sprucing up the utilisation rates, and resources that were previously lying idle are being plugged into suitable roles and profiles, he added.

Agrees Mr Avinash Vashistha, Chief Executive of advisory firm Tholons.

 

"Utilisation of bench strength would be increased -- from 70 per cent of utilisation earlier, it is likely to rise to about 85 per cent," he said. Amongst the top companies, the utilisation rate (including trainees) in case of Infosys stood at 69.4 per cent during the quarter ended December 2007 compared to 67.5 per cent in year ago period, while in the case of Satyam it rose to 78.21 per cent compared to 68.49 per cent a year ago.

 

No-show also down

 

Interestingly, the once-rampant no-show behaviour (candidates not showing up at a new job despite accepting the offer), is also down to 10-20 per cent against 50-60 per cent levels seen earlier.

 

Mr Balaji E, CEO of Ma Foi Management Consultants, feels that while there has not been a slump in actual numbers of recruitments, companies are no longer offering the 50 per cent or more hikes.

 

"Hirers are no longer willing to buyout notice periods of new employees from the existing employer. If they find an employee too costly or that they would have to wait too long, they consider another employee who comes without such baggage," he said.

 

He added that companies now tend to offer an average increase of about 25 per cent to lure in prospects.

 

Some firms are also 'trimming the tail'.

 

"Exits related to poor performance are certainly happening. Gone are the days when companies would be more lenient and spend on training employees time and again if they didn't measure up," he added.

 

(With inputs from Shamik Paul and K. Bharat Kumar)

 

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.