Weak demand for credit is forcing banks to focus attention on treasury operations, with a lower yield on the benchmark 10-year government securities likely to help buoy profitability for banks this year.
Punjab National Bank (PNB) managing director and chief executive Mallikarjun Rao on Saturday said the bank will earn moderate profit this fiscal, aided by treasury income and core banking activities. He said PNB made a ₹1,000 crore gain in the June quarter because of a reduction in interest rates.
Yield on the 10-year government security has fallen by 33 basis points since March-end. Bank balance sheets this quarter also saw a rise in holdings in government bonds, especially during the lockdown period when credit demand ebbed. Such bond holdings, as measured by the statutory liquidity ratio (SLR), have grown by 259 basis points (bps) between 27 March and 5 June to 27.97%, showed data from the Reserve Bank of India (RBI). A bank’s SLR is expressed as its investments in central, state government and other approved securities as a percentage of its net demand and time liabilities (NDTL). The RBI mandates a minimum SLR holding of 18%.
“Normal assessment is that growth will be low and RBI is expected to cut rates further. This will lead to more trading opportunities for these instruments. All banks will therefore have treasury income better than last year. Income from non-SLR bonds are also likely to be better as banks have increased their investment in corporate bonds this year," said a treasury head on condition of anonymity.
With RBI injecting surplus liquidity into the system through the targeted long term repo operations (TLTRO), banks’ portfolios saw a sharp rise in investments in corporate bonds in April and May.
Corporate bond issuances during the first two months of the fiscal have more than doubled to ₹1.63 trillion from ₹73,286.4 crore a year ago. The same period also saw sale of commercial papers dropping to ₹2.37 trillion from ₹3.95 trillion last year. RBI’s TLTRO window gave banks enough liquidity to invest in high-rated corporate papers.
“Given how the yields have come down, we expect treasury income to be much better than last year. Also, we could see some reversal in investment depreciation and profit on sale of investment this year," said Nitin Aggarwal, senior vice-president, Motilal Oswal.
To be sure, fiscal 2020 also saw banks’ treasury income rise by 7% to ₹50,541.33 crore from ₹47,099.71 crore in the previous year, showed data from Capitaline. This was on the back of a 114 basis points fall in yields on 10-year government security bonds during the same time.
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