India Ratings and Research (Ind-Ra) estimates banking industry’s profitability would be affected to the tune of INR305 billion in FY18 with return on assets of around 30bp. Also, public sector banks (PSBs) would continue to report losses in FY18. “The large losses emanating out of the quick rise in bond yields especially in the last six weeks will result in large mark-to-market losses on lenders’ non held-to-maturity investment holdings.
This will lead to a considerable fall in the banking industry’s treasury income in 4QFY18 with a spillover effect in FY19. In FY17, banks reported a gain on treasury of INR598 billion,” the rating agency warned. The agency believes midsized banks would be the worst hit, considering their proportionally swollen treasury books, after a period of muted credit and large deposit growth, and a steeper treasury profit booking in FY17.
Out of the total potential loss, the share of PSBs will be INR248 billion in FY18 (FY17: profit of INR427 billion) and that of private sector banks will be INR57 billion (profit of INR201 billion). Ind-Ra believes the resulting treasury loss will impact the renewed vigour post announcement of bank recapitalisation. After successive fall in bond yields starting from January 2015, rates have hardened from July 2017. The 10-year benchmark yield has moved up to 7.60% in January 2018 from 6.50% as on July 2017, up 110bp in six months.