Banks' profitability may take a hit from falling treasury gains
Mumbai: Strong treasury gains, which saved the blushes for several state-run banks in the quarter gone by may not be the saving grace anymore. Third quarter profits of PSU banks, which were down 85% quarter-on-quarter despite large treasury gains may once again be back in red. With yields rising nearly 40 basis points the treasury gains of banks is expected to be tepid in Q4FY17.
“As this magnitude of gains will not be available in 4Q post the recent 40 bp rise in yields and added operating profit pressure from marginal cost of funds based lending rate (MCLR) cut, and rise in pensions, many PSUs will be pushed back into losses in 4Q,” says Ashish Gupta, Research Analyst, Credit Suisse in a report.
G-sec yields have firmed up ~40 bp post the RBI policy meet and 10-year G-sec, now at 6.8%, is at a higher level as compared to 31 Dec 2016. Given significant accumulation of government securities last quarter at low yields last quarter, banks may have to take MTM losses on those securities, explains Gupta.
PSU banks which have booked treasury gains of over Rs 12,500 crore have managed aggregate profits pf only Rs 500 crore. Loan growth for most banks during Q3FY17 also decelerated sharply offsetting the benefit of large CASA deposit inflow and drop in funding cost. Another important issue is the increase in the formation of problem loans.
“A year post AQR, corporate NPL formation still hasn’t abated at both PSU and private corporate lenders and in 3Q led to gross slippages at ~4% of loans,” writes Gupta of Credit Suisse. “With still another 6-10% of loans stressed (restructured/watchlist/SDR, etc.) and large under-provisioning, corporate lenders credit costs will remain elevated.”
“As this magnitude of gains will not be available in 4Q post the recent 40 bp rise in yields and added operating profit pressure from marginal cost of funds based lending rate (MCLR) cut, and rise in pensions, many PSUs will be pushed back into losses in 4Q,” says Ashish Gupta, Research Analyst, Credit Suisse in a report.
G-sec yields have firmed up ~40 bp post the RBI policy meet and 10-year G-sec, now at 6.8%, is at a higher level as compared to 31 Dec 2016. Given significant accumulation of government securities last quarter at low yields last quarter, banks may have to take MTM losses on those securities, explains Gupta.
PSU banks which have booked treasury gains of over Rs 12,500 crore have managed aggregate profits pf only Rs 500 crore. Loan growth for most banks during Q3FY17 also decelerated sharply offsetting the benefit of large CASA deposit inflow and drop in funding cost. Another important issue is the increase in the formation of problem loans.
“A year post AQR, corporate NPL formation still hasn’t abated at both PSU and private corporate lenders and in 3Q led to gross slippages at ~4% of loans,” writes Gupta of Credit Suisse. “With still another 6-10% of loans stressed (restructured/watchlist/SDR, etc.) and large under-provisioning, corporate lenders credit costs will remain elevated.”
