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Indian banks set for windfall from bond gains

BOMBAY: Indian banks' bottomlines will receive a huge boost this year from profits realised through trading in the government bonds market which has been unusally high on volatility and volumes, analysts said on Monday.

Higher trading profits will offset lower fee and fund based income and if there is an interest rate reduction before the year end in March, those profits will be enhanced further.

"The volatility seen in the bond market will see banks booking huge trading profits. On a balance sheet size of 80-100 billion rupees banks will book gains to 500-800 million rupees," the head of trading at a European bank said.

"But it depends on each bank's portfolio, maturity and accounting system. A few could have trading losses too," he said.

The country's largest state-run bank State Bank of India (SBI) is likely to be the biggest beneficiary followed by others like Corporation Bank, Bank of Baroda and several private sector and foreign banks.

LEND LESS, INVEST MORE

Faced with low credit offtake and easy liquidity, banks have channelled more money into government bonds.

The government's massive borrowing target of 840 billion rupees, which it has already exceeded, made that easier.

According to the RBI, banks' holding of government securities was 2,730 billion rupees on January 14, a growth of 497.8 billion or 22.3 percent since April.

During the same period, non-food credit by banks rose by just 372.05 billion rupees to 4,147.33 billion rupees.

Bond prices rose dramatically during the year helped by falling bank interest rates and yields.

Both the banks' cash reserve ratio (CRR) and the key bank rate at which the RBI refinances the banking system were cut at the start of the year and after another reduction in October. The CRR is currently maintained at 10 percent of net liabilities.

Ten-year bonds, auctioned at a yield of 11.99 percent in April, are now quoting at 10.41 percent, a drop of nearly 160 basis points in the past eleven months.

After the cut in rates on government-run public savings schemes by 100 basis points on January 15, secondary market yields on ten-year bonds dipped 75 basis points.

Analysts said yields are expected to come down further with an expected cut in interest rates after the budget on Feb 29.

REVALUATION GAINS DO NOT MATTER

As the year-end approaches, most banks holding bonds bought at lower levels earlier, will sell to realise profits.

In the September-December period, SBI, Corporation Bank and Bank of Baroda boosted profits by booking huge trading gains.

The SBI netted trading profits worth 520 million rupees in the period, compared to a loss of 60 million rupees in the corresponding period last year.

Corporation Bank made trading profits of 2.2 billion rupees in the first nine months of the current financial year, compared to 730 million rupees in the same period last year.

Banks are required to revalue their portfolio at the year end as per yields the RBI announces, but those do not form part of profits.

"Any price appreciation in bonds that banks hold on March 31 cannot be shown as profits and will be transferred to an investment fluctuation reserve fund according to accounting norms," Sandip Dixit, bank analyst at Indo-Suez WI Carr said.

Analysts say the trading profits may boost bottomlines but are unlikely to lead to an upgrade in any banking stocks. "The quality of these earnings is questionable because of the sustainablity of this revenue stream as it depends upon external factors," Anand Vasudevan, vice-president, corporate research, SG Asia Securities said. -Reutters