The adverse impact of hardening of yields is expected to be felt most by public sector banks, given their higher holding of Government securities (G-Secs) of longer tenure. MTM losses on bond portfolios for them could be Rs 8,000-10,000 crore. For private banks such losses could be Rs 2,400-3,000 crore in Q1 FY2023.
The yield on 10-year government of India benchmark bonds rose sharply to 7.43 per cent on June 30, 2022 from 6.86 per cent on March 31, 2022.
While the recent rise in bond yields would pose challenges for banks in the current fiscal, banks enjoyed bumper gains on bond portfolios during the past two years. The public and private banks reported trading profits of Rs 83,200 crore in the last two years (Rs Rs 55,900 crore by public banks). Hence, the MTM losses could now be seen in conjunction with the profits made by the banks in the last two years.
While profitability may moderate in Q1 FY2023, overall profits for banks are likely to remain steady in FY2023 driven by improved loan growth and core operating profits, the rating agency said in a statement.
Referring to credit offtake till date in FY23, Icra said contrary to usual trends of negative incremental credit during first quarter of a financial year, the incremental credit growth for banks remained significantly positive in Q1 FY2023.
With rising bond yields and reducing investor appetite for corporate bonds, corporate bond issuances stood at the lowest level in four years in Q1 FY2023. To meet the funding requirements, large borrowers have shifted from debt capital market to banks, which also is aiding the improvement in the credit offtake.
While rising interest rates may moderate credit demand in the coming quarters, we expect incremental bank credit offtake of Rs 12.0-13.0 trillion (+10.1-11.0 per cent year on year). This is well above the incremental bank credit offtake of Rs 10.5 trillion (+9.7 per cent year on year) in FY2022, it added.
Headline credit growth for the system (+13 per cent YoY as of June 17, 2022) is also driven by low base though sequential growth of 2.2 per cent till date in FY23.