Bombay : Reeling from cash losses from tighter bond yields, banks are expected to post weaker earnings growth in the three months to June, analysts say.

Banks hold large holdings of government securities, including government loans (SDLs) and treasury bills, as part of regulatory investment requirements. Therefore, any volatility in the bond market should affect their earnings. Not only do they have to set aside mark-to-market provisions for falling bond prices (bond yields and prices move in opposite directions), but they also incur losses when selling such investments. .

While the yield on the benchmark 10-year government bond (G-Sec) jumped 60 basis points (bps) between April and June to reach 7.45%, corporate bond yields rose by about 70 bp. Analysts said the pressure will be visible in the June quarter results. The 10-year yield closed at 7.42% on Friday.

“We expect hedged banks to see earnings decline 7% year-on-year (y-o-y), driven by weak growth in operating performance – down 25% y-o-y – primarily due to high cash losses,” analysts at Kotak Institutional Equities said. in a July 6 report.

Kotak analysts said the one-year G-sec yield jumped 150 basis points in the first quarter of FY23, which would likely lead to significant losses. Although banks have built up an investment fluctuation reserve in recent years, they may not use this reserve and let losses trickle down to bottom line, the report said. The Reserve Bank of India (RBI) allows banks to create an investment fluctuation reserve from profits made on the sale of investments to hedge against market risks.

According to recent reports, the banks have asked the RBI to allow the June quarter losses to be spread over a few quarters, instead of taking the full impact in the first quarter. While it was not immediately clear whether RBI granted the request, there is precedent in April 2018 when it allowed banks to spread losses over four quarters.

According to analysts at Motilal Oswal Financial Services Ltd, profits for public sector lenders will remain subdued, impacted by a weak Treasury performance thanks to rising bond yields. In a June 7 report, its analysts said the pull in loan growth will keep net interest income healthy and allow for margin expansion.

“This will be further supported by a sustained reduction in the cost of credit as the asset quality performance of public sector banks remains stable,” he said.

That said, loan growth is expected to improve on stronger demand from businesses and individuals. While loans to retail borrowers amounted to 34.7 trillion as of May 20, up 16.4% from a year ago, credit to micro, small, medium and large enterprises amounted to 31.6 trillion as of May 20, up 8.7% from the previous year.

“Systemic lending is enjoying a healthy recovery…driven by continued strength in the retail and SME (small and medium-sized enterprises) segment, while the enterprise segment is also experiencing a recovery. Disbursement growth across several retail products exceeded pre-covid levels, while business growth was driven by improving utilization levels and working capital requirements,” the Motilal report said.

However, not everyone seems convinced by the overall growth figures. Analysts at Kotak Institutional Equities have pointed out that they have not yet seen convincing signs of a recovery in business credit growth, as companies have deleveraged significantly in recent years. “The outlook for credit growth for micro, small, and medium enterprises does not look very rosy as many promoters have recently experienced significant difficulties due to pandemic-induced stress,” the Kotak Institutional Equities report said.

In its Financial Stability Report, RBI said that while corporate sales and profitability have increased, a sustainable start to the investment cycle remains elusive. The peak recovery in credit demand was seen in the second half of 2021-2022 and the momentum has so far continued in FY23, he added.

“While personal loans remained a dominant component, demand for credit from the industrial sector revived after collapsing in 2020-21 as well as the first half of 2021-22. been granted in the form of working capital loans,” RBI said.

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