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Domestic rating agency ICRA in its latest report has said that rising bond yields will force banks to report Mark-To-Market (MTM) losses of up to Rs 13,000 crore on their investment portfolios in the April-June quarter (Q1FY23). It said profits will moderate for the quarter, but improved loan growth and operating profits will ensure that the banks' bottom lines remain steady for FY23. It estimated the system will report an incremental credit growth of 10.1-11 percent or Rs 12-13 lakh crore in FY23.

According to the report, the banks have a higher holding of government securities, especially the ones with longer tenors, in their investment portfolios due to which the rising bond yields pose headwinds from a profitability perspective. The MTM losses on bond portfolios will come at Rs 8,000-10,000 crore for public sector banks and Rs 2,400-3,000 crore for private banks in Q1 FY23.  Despite these expected MTM losses, it expects the net profits of the banks to remain steady, given the expected growth of 11-12 percent in their core operating profits in FY23, which will more than offset the MTM losses.

The report, however, said that if the yields harden substantially going forward, there could be a sequential moderation in the net profits in FY23. It said the incremental credit growth for banks has remained significantly positive in Q1 FY23, contrary to the usual trend of negative incremental credit during that period in the past and added that growth was supported across all segments. It noted that with rising bond yields and reducing investor appetite for corporate bonds, corporate bond issuances stood at the lowest level in four years in Q1 FY23, prompting large borrowers to shift from the debt capital market to banks for their funding requirements.