PremiumMUMBAI: The onset of covid-19 resulted in windfall gains for public sector banks with trading profits on their bond portfolios rising sharply after the steep cut in policy rates by the Reserve Bank of India (RBI) in March 2020, rating agency Icra Ltd said.
The repo rate and the reverse repo rate were cumulatively cut by 115 basis points (bps) and 155 bps, respectively.
With a year-on-year (y-o-y) deposit growth of 11.4% and muted credit growth of 5.5% in FY21, liquidity in the banking system remained abundant at Rs5-7 trillion in FY21. Icra said with the rate cuts and abundant liquidity, the daily average for the benchmark 10-year government securities declined from 6.42% in Q4 FY20 to 6% in Q1 FY21, 5.93% in Q2 FY21 and to 5.9% in Q3 FY21 before rising to 6.06% in Q4 FY21. The significant volatility in bond yields also provided banks with ample trading opportunities, it said.
“As the banks booked gains on their bond holdings, their fresh investments are closer to the market rates, thereby aligning the yield on their bond portfolios closer to the market rates. The yield on the investment book for the public banks declined to 6.18% in Q4 FY21 from 6.79% in Q4 FY20. Moreover, as the scope for further rate cuts is limited with a possible reversal of the policy stance after January 2022, the incremental gains could be modest in FY22," said Anil Gupta, vice-president, financial sector ratings, at Icra Ltd.
On an aggregate, 12 public banks reported a profit in FY21 after five consecutive years of losses (FY2016-2020). Apart from trading gains, the return to profitability was supported by lower credit provisions on their legacy non-performing assets (NPAs), after the high provisions made over the last few years, it said.
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