Financial institution shares Q1 effects: Banks likely to lose Rs 11,790 cr in Q1 on bond rally: report

Mumbai: Banks won’t take a big hit to profitability this quarter due to EM bond yields, which could devour 5.3 percent (Rs 11,790 crore) into their online revenue stream in a worst-case scenario, at the rate of a recording. In a worst-case scenario, banks could see a profit erosion of 2.6 percent in their current profit before provisioning and 5.3 percent in their profit after tax from cash losses in the first quarter, India Ratings reports. mentioned in a nutshell Friday.

During the first quarter, bond yields rose 61 basis points, peaking at 7.5 in pace with one hundred.

This is because a 100 basis point upward shift year-over-year in the yield curve can affect the current system-wide pre-funding benefit of 4.5 percent and return to ownership by just 9 basis points. , the company mentioned.

Banks will continue to face headwinds in the current cycle of rising interest rates, however the company argued that the effect could be less than previous cycles as banks can use their funding fluctuation buffer , reclassify their buy and sell portfolio between held-to-maturity (HTM) and available-to-market (AFS) and further calibrate the modified length of the AFS portfolios.

The supplemental filing argues that banks will benefit from lower repo prices, a higher revenue stream from bond purchases with higher yields, and interest rate resets on fixed income bonds. floating charge (even if in limited quantity), compensating the losses of the Treasury.

With overall growth in bank profitability expected in FY23 and some banks already offering increased yields (up to 7.5 percent), according to the firm, the effect on the return to l Real estate will also be as low as 9 bps if none of the aforementioned mismatches are in position.

In addition, there was a moderation in 10-year benchmark G-Secs yields from a high of 7.62 cents in June to around 7.45 cents this month after that the Reserve Bank unveiled a chain of steps to include. the rupee.

Ankit Jain, senior analyst at the firm, said banks are better positioned to absorb the effect of the upward movement in G-Sec yields from previous cycles.

“We believe 1Q cash losses may impact Pre-Provisioning Operating Profit (PPOP) by 2.6% and Income After Tax by 5.3% of Rs 11,790 crore as a change in 100 basis points over the year in the yield curve can impact system-wide PPOP by 4.5% and return on assets by just 9 basis points. »

Market value losses in banks could be Rs 11,790 crore on an after-tax basis, of which state run banks could be Rs 8,630 crore and Rs 3,160 crore via those in the sector private.

However, the market value effect will also be minimized by using the funding fluctuation reserve, which is not less than 2 percent in their AFS and HFT investments and is just created to regulate the higher volatility of returns.

Public sector banks lose relatively more in terms of PPOP at 6.7 percent and private sector banks may have a lesser effect at 2.4 percent. The effect on current equity level 1 (CET1) of public banks could be 21 basis points and that of private banks 10 basis points and system-wide it will be 16 basis points, depending on the file.

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