Govt borrowing plan to cushion treasury portfolio of banks in Q4

Treasury portfolio of banks will get a much-required breather in the fourth quarter as bond prices improve following announcement of the borrowing programme by the government.

The government surprised the market by reducing its plans to borrow Rs 2.88 lakh crore during April-September, only 47.5 percent of total budgeted gross borrowing as against 60-65 percent share in the first half of previous years.

Indian government bonds or securities rallied with the benchmark 10-year yield falling to its lowest in two months on Tuesday following a surprise cut in the borrowing programme for the fiscal year starting April.

The 10-year bond yield dropped to as much as 7.35 percent from 7.62 percent on Monday, lowest since January 29. Bond prices and yields (interest rates) move in the opposite direction.

“Yes, we have seen the 10-year bond yields come off by 25-30 bps (basis points or percentage points) to 7.35-7.37 percent, same as the December figure. So to that extent, if the yields stay to end the year, then possibly there would not be any MTM (mark-to-market) losses for the banks,” said Karthik Srinivasan is Senior Vice President and group head – Financial sector ratings at ICRA.

ICRA’s estimates earlier this month had suggested that with a 40 bps further increase in bond yields during the current quarter, the losses on bond portfolios could be upwards of Rs 12,000 crore during Q4 FY2018.

This was because the yields (during early March) had gone up to about 7.60 percent, almost 40 bps higher from December levels.

“Depending on the mix of portfolio and the quantum, there does not seem to be any material losses if they end on the closing day (tomorrow) at today’s levels…So, yes in that sense, the lower borrowing programme will help banks’ profitability to that extent, given the breathing space provided in their treasury portfolio in the March quarter” Srinivasan said.

Government Borrowing Plan

While the first half will see lower government borrowing, overall borrowing for the full year 2018-19 was also reduced by Rs 50,000 crore to Rs 5.56 lakh crore.

The government will increase its funding requirement through the NSSF by additional Rs 25,000 crore making the total amount to Rs 1 lakh and also reduced its buyback plan by Rs 25000 crore.

Over last six months, bond yields have been under pressure and surged over 100 basis points due to concerns of rising crude oil prices, widening current account deficit, reduction in banking liquidity and the prospect of faster rate hike by the US Federal Reserve.

In the third quarter ended December 2017, yields on the benchmark 10-year government bond surged 67 basis points, taking prices lower. Although the exact quantum of losses in the third quarter across banks is yet to be ascertained, ICRA’s data of 18 public sector banks suggested the treasury losses stood at Rs 5,600 crore as compared to a profit of Rs 31,100 crore during H1 FY2018.

Saswata Guha, Director of financial institutions at Fitch Ratings India, said, “Clearly, rates have substantially moved up over the last year and we expect the trend to continue. Our house view is that RBI is likely to hike (policy rate) by about 75 bps over the next two years. This means there will be general pressure on the rates front.”

According to him, looking at the AFS (Available for Sale) and HFT (Held for trading) category of bonds, the impact would be quite substantial. “As per our rough estimate, a 100 bps upward movement can shave off 30-40 bps of ROA (return on assets) for the bond holders. The ROA currently for many banks is negative.”

Economic Affairs Secretary Subhash Garg, while announcing the programme on Monday, said, “Lower bond sales ease one of the biggest worries for traders, who have been concerned about the government’s near-record borrowing as state-run banks, the main buyers of sovereign notes, stay away. Talks are also in progress with the central bank to raise limits for foreign investments in rupee debt.”

Radhika Rao, India Economist, DBS Bank and Eugene Leow, Rates Strategist, DBS Bank said in a note, “Lower borrowings in H1 is encouraging for the short term but there are a few areas of concern for the medium term. First, borrowings were front-loaded in the past to ensure limited crowding-out impact, as credit growth is usually off to a slower start in H1. Second, supply will now get bunched up in H2, at a time when the fiscal run-rate typically turns adverse.”

According to a Kotak report, the benchmark 10-year paper will likely trade in 7.20-7.50 percent range in 1HFY19, after ending FY2018 at approximately 7.40 percent.moneycontrol