Industry

Windfall treasury gains added to PSB profits in FY21: ICRA

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The onset of COVID-19 resulted in windfall gains for public sector banks (PSBs), with trading profits on their bond portfolios rising sharply after the steep cut in policy rates by the RBI in March 2020, ratings agency ICRA said.

The repo rate and the reverse repo rate were cumulatively cut by 115 basis points (bps) and 155 bps, respectively, in March 2020 and May 2020 to 4% and 3.35%, respectively, by May 2020. (100 basis points = 1 percentage point)

With a year-on-year deposit growth of 11.4% and muted credit growth of 5.5% in FY21, the liquidity in the banking system remained abundant at ₹5-7 trillion in FY2021, ICRA said in a report. “With the rate cuts and abundant liquidity, the daily average for the benchmark 10-year government securities declined from 6.42% in Q4 FY20 to 6.00% in Q1 FY21, 5.93% in Q2 FY21 and 5.9% in Q3 FY21 before rising to 6.06% in Q4 FY21,” the ratings agency said.

The significant volatility in bond yields also provided banks with ample trading opportunities, ICRA added.

According to ICRA’s estimates, public sector banks booked profits of ₹316 billion from this source (treasury operations), compared with the overall PBT of ₹459 billion in FY21. “As banks booked gains on their bond holdings, their fresh investments are closer to the market rates, thereby aligning the yield on their bond portfolios closer to the market rates,” said Anil Gupta, VP, Financial Sector Ratings.

“The yield on the investment book for the public banks declined to 6.18% in Q4 FY2021 from 6.79% in Q4 FY2020. Moreover, as the scope for further rate cuts is limited with a possible reversal of the policy stance after January 2022, the incremental gains could be modest in FY2022,” he said.

On an aggregate, the 12 PSBs reported a profit in FY21 after five consecutive years of losses (FY16-20). “Apart from trading gains, the return to profitability was supported by lower credit provisions on their legacy non-performing assets, after the high provisions made [in] the last few years,” ICRA said in the report.

Notwithstanding the profits reported by the public banks in FY21, the profits before tax (PBT) of other public banks, excluding SBI, were lower than their trading gains, reflecting the challenges posed by COVID-19 on the asset quality and profitability of the banks.

“Notably, the trading gains for public banks in FY21 exceeded the capital infusion of ₹200 billion received from the Government of India),” ICRA added.

Similarly, private banks also saw an improvement in trading profits to ₹184 billion in FY21 (₹147 billion in FY20), which was 21% of their PBT in FY21 (28% in FY20).


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Printable version | Jul 25, 2021 12:50:49 PM | https://www.thehindu.com/business/Industry/windfall-treasury-gains-added-to-psb-profits-in-fy21-icra/article34896210.ece

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