Mumbai: The surge on yield on 10-Year Government Security (G-sec) by 67 bps during the quarter ended December may lead to mark-to-market losses for banks on their investment portfolios, says rating agency ICRA.

With reduced cushion to absorb interest rate movements, the recent surge in bond yields is expected to result in MTM losses on the Available for Sale (AFS) portion of investment portfolio of banks.

The MTM loss for the entire banking sector is estimated at Rs. 15,500 crore during the quarter, the ICRA report said

"As on September 30, 2017, Public Sector Banks (PSBs) had a larger share of AFS book in their total investment portfolio with longer duration in relation to Private Sector Banks (PVBs); accordingly, PSBs are likely to account for 80% share of overall MTM losses as per our estimates," said Karthik Srinivasan, Group Head, Financial Sector Ratings, ICRA.

"With losses before tax of Rs. 5,624 crore during H1FY2018, MTM losses will further add to losses and erode capital ratios for PSBs. In contrast, PVBs are relatively better placed to absorb the MTM losses with profit before tax of Rs. 30,994 crore during H1FY2018. With unexpected surge in yields on consequent increase in losses, the GoI may need to increase the capital it intends to frontload into the PSBs by recapitalisation bonds."

A steady decline in bond-yields had resulted in windfall profits for the banking sector, especially during the last six quarters (Q4FY2016 - Q2FY2018), whereby the banks made a treasury gains of approximately Rs. 1 lakh crore, which was much higher than the total profit before tax (PBT) of Rs. 51,105 crore for the entire banking sector during this period.

While a part of the treasury gains were also accounted by divestments of non-core investments by banks given the profitability pressures, however the same is estimated to be less than Rs. 20,000 crore in overall treasury gains, reflecting a large share of gains coming from their bond portfolios.

Because of larger share of excess G-sec holdings, a larger share of the treasury gains was also accounted by PSBs, which cumulatively accounted for treasury gains of Rs. 74,300 crore during the above mentioned period. However, despite these sizeable treasury gains, PSBs reported losses before tax of Rs. 48,020 crore during the said period.

As banks gradually booked profits on their investment portfolios, their yield on their investment portfolios declined to 7.0% during Q2FY2018 vs 7.9% during Q4FY2016, thereby reducing the cushion to absorb the losses (MTM) against adverse interest rate movements.