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MTM losses due to rise in yields
Government of India increased its market borrowing target by Rs520bn
for 2HFY12 which caused the 10 year yield to spike to 8.43%; yields may
rise further. Rise in 10 year yields likely to increase Mark to Market losses
for banks on their G-Sec holdings. Banks most impacted are OBC, SBI and
Canara (2%-4% of earnings for every 25bps rise in yields); impact on
private banks and BOI is very low. We expect 10 year yields to come off
by Mar-12, however yields may remain high, if credit demand picks-up in
2HFY12 and lead to a fall in G-Sec demand from the banks.
Government borrowing program raised
India’s central government yesterday announced a higher-than-expected market
borrowing for 2HFY12, which caused the 10-year yield to spike 10bp to 8.43%.
The government will raise Rs2.2trn in 2HFY12 (Rs2.5bn in 1H FY12). Thus, the fullyear
market borrowing for FY12 will be Rs4.7tn, higher by Rs520bn (0.6% of GDP).
Key reason for higher borrowing is not an upward revision in the budget deficit but
a shortfall in other sources of finances. Specifically, there is a shortfall of Rs350bn
in small-savings accounts (as bank deposits are more attractive as rates went up).
10 year yield have spiked to 8.43%, may rise to 8.5%-8.6%
Over past 12 months, the short term yields have gone up 150bps to 8.3% while the
10 year yield has been in the range of 8.1-8.4%.
Higher than expected borrowing has led to a spike in 10 year yield to 8.43% and
our economics team believes that in near term this could climb up to 8.5%-8.6%.
Our economics team, however, expects 10 year yield to come back to 8.1%-8.3%
range by Mar-12 as the local bond market prices in a combination of the end of
monetary tightening and lower borrowing expectations for next year.
We believe that a pick-up in credit demand picks in 2H may lead to a sharp fall in
G-Sec appetite among banks, especially as the G-Sec holding for most banks is well
in excess of the minimum regulatory requirement under SLR (24% of liabilities).
In such a situation, unless the FII limit is opened-up or the RBI resorts to open
market operations (OMO) / liquidity easing measures, the demand – supply
mismatch in G-Sec may result in bond yields staying at elevated levels.
MTM losses on bond portfolios could impact earnings by up to 4%
Unlike in 2003-2005, banks’ holding of G-Secs in the Available for Sale (AFS)
category is much less and the duration of the AFS portfolio is also lower. Hence the
MTM losses on the bond portfolios would be much lower than the previous cycle.
Banks that are likely to be the most impacted are mainly the tier II PSU banks that
have ~25% of their G-Sec holding in the AFS category. Average earnings impact
for these banks would be 2-4% for every 25bps of rise in yields.
Private banks, BOI and Union Bank are best placed – for these banks the earnings
impact for every 25bps rise in yields would be <1%.
Earnings impact up to 4% of FY12CL profit for 25bps rise in yields
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MTM losses due to rise in yields
Government of India increased its market borrowing target by Rs520bn
for 2HFY12 which caused the 10 year yield to spike to 8.43%; yields may
rise further. Rise in 10 year yields likely to increase Mark to Market losses
for banks on their G-Sec holdings. Banks most impacted are OBC, SBI and
Canara (2%-4% of earnings for every 25bps rise in yields); impact on
private banks and BOI is very low. We expect 10 year yields to come off
by Mar-12, however yields may remain high, if credit demand picks-up in
2HFY12 and lead to a fall in G-Sec demand from the banks.
Government borrowing program raised
India’s central government yesterday announced a higher-than-expected market
borrowing for 2HFY12, which caused the 10-year yield to spike 10bp to 8.43%.
The government will raise Rs2.2trn in 2HFY12 (Rs2.5bn in 1H FY12). Thus, the fullyear
market borrowing for FY12 will be Rs4.7tn, higher by Rs520bn (0.6% of GDP).
Key reason for higher borrowing is not an upward revision in the budget deficit but
a shortfall in other sources of finances. Specifically, there is a shortfall of Rs350bn
in small-savings accounts (as bank deposits are more attractive as rates went up).
10 year yield have spiked to 8.43%, may rise to 8.5%-8.6%
Over past 12 months, the short term yields have gone up 150bps to 8.3% while the
10 year yield has been in the range of 8.1-8.4%.
Higher than expected borrowing has led to a spike in 10 year yield to 8.43% and
our economics team believes that in near term this could climb up to 8.5%-8.6%.
Our economics team, however, expects 10 year yield to come back to 8.1%-8.3%
range by Mar-12 as the local bond market prices in a combination of the end of
monetary tightening and lower borrowing expectations for next year.
We believe that a pick-up in credit demand picks in 2H may lead to a sharp fall in
G-Sec appetite among banks, especially as the G-Sec holding for most banks is well
in excess of the minimum regulatory requirement under SLR (24% of liabilities).
In such a situation, unless the FII limit is opened-up or the RBI resorts to open
market operations (OMO) / liquidity easing measures, the demand – supply
mismatch in G-Sec may result in bond yields staying at elevated levels.
MTM losses on bond portfolios could impact earnings by up to 4%
Unlike in 2003-2005, banks’ holding of G-Secs in the Available for Sale (AFS)
category is much less and the duration of the AFS portfolio is also lower. Hence the
MTM losses on the bond portfolios would be much lower than the previous cycle.
Banks that are likely to be the most impacted are mainly the tier II PSU banks that
have ~25% of their G-Sec holding in the AFS category. Average earnings impact
for these banks would be 2-4% for every 25bps of rise in yields.
Private banks, BOI and Union Bank are best placed – for these banks the earnings
impact for every 25bps rise in yields would be <1%.
Earnings impact up to 4% of FY12CL profit for 25bps rise in yields
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