Bond Gains Accounted For Two-Thirds Of PSU Banks’ Profit

A customer talks on his phone as he exits a State Bank of India (SBI) branch in Patna, Bihar, India. (Photographer: Anindito Mukherjee/Bloomberg)

Bond Gains Accounted For Two-Thirds Of PSU Banks’ Profit

India’s public sector banks reported a profit for the last fiscal after five years, largely supported by windfall treasury gains, according to ICRA Ltd.

Public banks booked profit worth Rs 31,600 crore from treasury gains compared to overall profit before tax of Rs 45,900 crore in FY21, the estimates provided by the rating agency in its media statement showed.

Excluding State Bank of India, profit from sale of bonds exceeded the profit before tax of other public lenders.

Bond gains, ICRA said, exceeded the government’s capital infusion of Rs 20,000 crore in the fiscal ended March 2021.

Apart from treasury gains, the banks’ return to profitability was supported by lower credit provisions on their legacy non-performing assets after high provisions made during the last few years, it said.

Not just public lenders, but private peers also witnessed a rise in their trading profit to Rs 18,400 crore in FY21—21% of their profit before tax for the year—from Rs 14,700 crore in the prior fiscal.

With deposit growth of 11.4% on an annual basis and credit growth muted at 5.5% in FY21, liquidity in the banking system remained abundant at Rs 5-7 lakh crore, the rating agency said.

“With rate cuts and abundant liquidity, daily average for the benchmark 10-year government securities declined from 6.42% in Q4FY20 to 6% in Q1FY21, 5.9% in Q2FY21 and 5.9% in Q3FY2021 before rising to 6.06% in Q4FY21,” ICRA said. The significant volatility in bond yields also provided banks with ample trading opportunities.

But these treasury gains, according to ICRA, are likely to be much lower in the ongoing financial year, given limited headroom for a further decline in bond yields.

“While banks make windfall profits amid the declining yield scenario, they could face challenges in their bond portfolios in a rising interest rate regime,” Anil Gupta, vice president, financial sector ratings at ICRA, was quoted as saying in the statement. While the Reserve Bank of India is unlikely to be in a rush to hike interest rates in the near term, banks would need to be mindful as treasury profits would be relatively muted in FY22, he said.

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