Banking News

Banks face losses of up to 10% on long-dated G-Secs as yields rise


Indian banks could lose up to 10% on longer-tenure bonds held to maturity, but relatively lower yield gyrations than in the West should cushion treasury losses at local lenders that are witnessing increasing demand for credit in the world’s fastest-expanding major economy.

“As per our analysis, if the losses are fully realised which is unlikely in our view on the held-to-maturity book, the range of impact on net worth could be 2-10% for Indian banks,” said Suresh Ganapathy, associate director, Macquarie Capital. “However, this remains a theoretical exercise and unlikely to crystallise.”

Ganapathy added that in the US when banks sell their HTM book, they need to revalue the entire book and recognise losses. In India, banks transfer a part of the portfolio to the available for sale or AFS category and only book the loss on that HTM book that is transferred/sold.

“Maybe, it’s time for regulators to wake up and be more conservative in terms of accounting in the wake of what has happened around the globe,” Ganapathy said.

Banks Face Losses of Up to 10% on Long-dated G-Secs as Yields Rise

After the failure of some regional banks in the US, investors have raised concerns about possible losses on the HTM book of banks across the world.

In India, investment portfolios of banks are classified under three categories: Held to Maturity (HTM), Available for Sale (AFS) and Held for Trading (HFT). Banks normally hold securities acquired by them with the intention to hold them up to maturity under the HTM category.

AFS and HFT categories together form the trading book of banks. Securities held under both these books are required to be marked to market.Most analysts say that Indian banks are well cushioned from any possible shocks since most lenders are funded 85-90% by domestic deposits. On the assets side, investments form roughly 22% of the balance sheet of banks and 85% of the investment book is in Indian government securities. Roughly 60% of the investment book of banks is in HTM and G-secs form almost 95% of the HTM book.

“Silicon Valley Bank was forced to liquidate its HTM portfolio due to an accelerated run-off in deposits,” said Pranav Gundlapalle, head of India financials at Bernstein. “We see no such scenario for the Indian banks and therefore any MTM impact on the HTM portfolio would be spread over a long period. However, even if forced to liquidate the HTM portfolio today, we estimate the impact to be <6% of equity for the Indian Private sector banks.”

Gundlapalle added that the Indian regulators have not been asleep at the wheel and had set limits on the size of HTM portfolio that banks can hold and had also advised banks to hold an “investment fluctuation reserve” to protect banks against adverse scenarios.


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