Banks to face leverage losses of Rs 13,000 Crore on rising bond yields: report

Banks hold more government securities in their investment portfolios.

Mumbai:

Rising bond yields will force banks to report market value losses of up to Rs 13,000 crore on their investment portfolios in the April to June quarter, a report said on Tuesday.

Earnings will moderate for the quarter, but improved loan and operating profit growth will ensure banks’ bottom line remains “steady” for FY23, according to the national ratings agency’s report Icra.

The agency has estimated that the scheme will record additional credit growth of 10.1-11% or Rs 12-13 lakh crore in FY23.

Banks are holding more government securities, especially those with longer durations, in their investment portfolios, so rising bond yields pose headwinds from a profitability perspective.

MTM (Mark-To-Market) losses on bond portfolios will amount to Rs 8,000-10,000 crore for public sector banks and Rs 2,400-3,000 crore for private banks in the first quarter of the year. fiscal year 23, according to the report.

“Despite these expected MTM losses, we expect banks’ net profits to remain flat, given their expected 11-12% growth in core operating profits in FY23, more than offsetting MTM losses”, said the vice-president of Icra. said Anil Gupta.

Gupta, however, added that if yields tighten significantly going forward, there could be a sequential moderation in net earnings in FY23.

Incremental credit growth for banks remained significantly positive in the first quarter of FY23, contrary to the usual trend of negative incremental credit during this period in the past, he said, adding that growth was supported in all segments.

With bond yields rising and investor appetite for corporate bonds waning, corporate bond issuance fell to a four-year low in the first quarter of FY23, prompting large borrowers to switch from the debt capital market to banks for their financing needs, he said.

The agency admitted that rising interest rates could dampen demand for credit in the future, but expects the system to end fiscal year 23 with credit growth of up to 11%, compared to 9.7% in fiscal year 22.

Rate transmission should be faster in this cycle for banks, as 43% of banks’ floating rate loans are linked to external benchmarks, he said, adding that 77% of loans are floating for banks. .

This, together with the lag in the upward revaluation of deposits and improving credit growth, will contribute to improved operating profits for banks, he said.

Slippages could continue to moderate and remain at 2.5-2.7% of standard advances in FY23 on reducing bounce rates and delinquent loans at most banks, the Bank said. agency, adding that the gross non-performing assets (NPA) ratio would further improve to 5.2-5.3% by the end of March 2023.

“Despite improving overall asset quality figures, stressed assets (net NPAs and standard restructured loans) amounted to 3.8% of standard advances as of March 31, 2022, above the pre-Covid level of 3, 1%,” Gupta said. .

The agency said additional capital requirements remain limited for most public banks and large private banks.

It maintained its outlook for banks at “stable” for FY23 on stable earnings, improvements in asset quality and capitalization.