Yield surge erodes bank profits in Q1, SBI's the worst hit
The good news is that yields aren’t expected to increase significantly for the remainder of the year, which will allow banks to partially recover their losses. On worries that growing inflation will compel the Reserve Bank of India to raise rates, the rate in June rose to 50%, the highest level in more than three years. The decrease in bond valuations had to be taken into account by banks, which had an impact on their treasury revenue.
The biggest victim was State Bank of India, a public sector giant that unexpectedly reported a 7% drop in net profit year over year due to a significant decline in the market value of the bank’s government bond holdings. The bank’s investments suffered a loss of Rs 6,549 crore during the quarter, resulting in a decrease in net profit. Only Canara Bank and ICICI Bank managed to defy the trend, each posting profits of Rs. 1,849 crore and Rs. 36 crores, respectively.
The gains, according to a senior bank official, were made possible by the bank’s quick action in selling longer-duration assets in early April before yields started to rise. This allowed the bank to lower its average duration and stop the value fall. The majority of the mark-to-market losses, according to analysts, have already been realized because it is improbable that bond yields will suddenly increase once more.
“The majority of banks would have transferred a portion of their available for sale book into HTM, which the RBI only permits once a year. In addition, banks would gradually classify bond investments under HTM to safeguard the portfolio against additional yield curve steepening “the Nomura Securities executive director of equity research, Nilanjan Karfa. Bond yields increased by over 75 basis points in a single quarter, according to Bank of Baroda CEO Sanjiv Chadha, a move that typically takes a whole year. But compared to what we have seen, Chadha said, “the downside seems to be somewhat restricted moving forward.”