The banking sector is more likely to witness mark-to-market (MTM) losses of Rs 10,000-13,000 crore within the first quarter of FY23 within the wake of the rising bond yields.
Rating company Icra has estimated MTM losses on bond portfolios at Rs 8,000-10,000 crore for public sector banks and Rs 2,400-3,000 crore for personal banks in Q1 (June quarter) of FY2023.
India’s 10-year benchmark bond yield had risen by 60 foundation factors to 7.45 per cent throughout the quarter ended June 2022, resulting in a fall of their costs. The rise in bond yields got here after the RBI hiked the Repo charges by 90 foundation factors since May this yr amid the worldwide surge in inflation and hike in rates of interest by the US Federal Reserves. Bond yields within the US and different nations have additionally shot up.
Mark-to-market loss — which is an accounting entry — can happen when authorities securities held by banks are valued on the present market worth. If a safety was bought at a sure worth and the market worth later fell, the holder would have an unrealised loss, and marking the safety all the way down to the brand new market worth would lead to MTM loss.
Anil Gupta, vp, Icra, mentioned: “Despite these expected MTM losses, we expect the net profits of the banks to remain steady, given the expected growth of 11-12 per cent in their core operating profits in FY2023, which will more than offset the MTM losses. However, if the yields harden substantially going forward, there could be a sequential moderation in the net profits in FY2023.”
The headline asset high quality numbers proceed to enhance for banks with gross non-performing advances (GNPAs) of 6 per cent (lowest in final six years — since December 31, 2015) and web NPAs of 1.7 per cent (lowest in final 9 years, i.e. March 31, 2013). “With a lower slippage rate and better credit growth, we expect the GNPAs to decline further to 5.2-5.3 per cent by March 31, 2023. The net NPAs may, however, remain range-bound at 1.6-1.8 per cent as the recoveries and upgrades could moderate in the current year in the absence of restructuring,” it mentioned.
With rising bond yields and lowering investor urge for food for company bonds, company bond issuances stood on the lowest degree in 4 years in Q1 of FY23. To meet the funding necessities, massive debtors have shifted from debt capital market to banks, which is also aiding the advance within the credit score offtake. While rising rates of interest might reasonable credit score demand within the coming quarters, the ranking company has estimated the incremental financial institution credit score offtake at Rs 12-13 trillion (10.1-11.0 per cent rise year-on-year), nicely above the incremental financial institution credit score offtake of Rs 10.5 trillion in FY22.
