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Banks to report Rs 13,000-crore MTM losses in Q1 on rising bond yields: Icra


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Rising bond yields will force banks to report mark-to-market losses of up to Rs 13,000 crore on their investment portfolios in the April-June quarter, a report by Icra said on Tuesday. Profits will moderate for the quarter, but improved loan growth and operating profits will ensure that banks’ bottom lines remain “steady” for FY23, the report said.

The effect of the treasury losses will be felt more by public sector banks as they hold a higher share of government securities (G-Secs) of longer tenure.

Public sector banks are expected to face mark-to-market (MTM) losses to the tune of Rs 8,000-10,000 crore, according to Icra estimates, while private banks may report MTM losses of Rs 2,400-3,000 crore in Q1FY23.

“If the yields harden substantially going forward, there could be a sequential moderation in the net profits in FY23,” Anil Gupta, vice-president of Icra, said.

Despite the headwind caused by the treasury losses on banks’ profitability, its effect will be offset by improvement in core lending operations. With the rising yields, companies prefer to meet their funding requirement by taking loans, instead of tapping the debt market. This has led to an uptick in corporate credit offtake, complementing other loan segments. The non-food bank credit grew in double digits during Q1FY23. The ratings agency expects incremental bank credit offtake of Rs 12-13 trillion for the current fiscal, higher than Rs 10.5 trillion in FY22.

“Despite these expected MTM losses, we expect the net profits of the banks to remain steady, given the expected growth of 11-12% in their core operating profits in FY23, which will more than offset the MTM losses,” Gupta said.

With 43% of floating rate loans being tied to external benchmarks and a lag in increase in deposit rates, banks are likely to show an improvement in their operating profits. The transmission of changes in policy rates takes place faster in case of externally-benchmarked loans.

On the asset quality front, banks will continue to post improvement on account of lower slippages and credit growth. The gross non-performing asset (NPA) ratio is expected to improve to up to 5.2% by the end of the current financial year, from 6% in the previous year, Icra said. However, the net NPA ratio is likely to remain range bound at around 1.6-1.8% on account of lack of recoveries and upgrades. Slippages are likely to improve further to around 2.5-2.7% in FY23 due to falling bounce rates and overdue loans, the agency said.

Despite the improvement in headline asset quality, stressed assets stood at 3.8% of standard advances as on March 31, 2022, higher than the pre-Covid level of 3.1%, the agency said.




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