Mark-to-market (MTM) losses on the available for sale (AFS) portfolio of Indian banks is likely to remain lower in the fourth quarter of the current financial year as yields on the bonds have stabilised, especially on the 10-year benchmark bond, money market experts said.
MTM losses are losses generated through an accounting entry rather than the actual sale of a security. They can occur when financial instruments held are valued at the current market price.
“Now government security (G-Sec) yields have eased after rising in last month, so we may see lower incremental MTM losses in Q4 on the AFS portfolio. We witnessed the same thing in the previous quarter too, when yield fell that led to less MTM losses,” said Arun Bansal, executive director and head of treasury, IDBI Bank.
An AFS is a debt or equity security purchased with the intent to sell it in the short term to earn a profit.
“We believe the incremental MTM losses on this (AFS) portfolio shall be limited, as the 10-year G-Sec yield has been largely stable,” Emkay Global said in a report.
The 10-year benchmark 7.26 percent 2032 bond yield is now trading at 7.3289 percent, against 7.4623 percent on February 28.
However, some non-SLR portfolios may see an increase in MTM losses as spread on these instruments has widened by 5-7 basis points (bps).
Reduction in AFS portfolio
Dealers said that most state-owned lenders have reduced their holdings in the AFS portfolio in the past few years and increased their held-to-maturity (HTM) portfolio. Hence increase in bond yields will not impact their portfolio. However, private banks hold a good chunk in the AFS category, so any sharp movement in the yield affects their portfolio, dealers added.
“Most PSU banks have around 75 percent in the HTM category which at present is insulated from MTM provisions,” Bansal said.
According to a Jefferies report, of their total investment, State Bank of India (SBI) and Bandhan Bank hold 72 percent in the HTM category and 28 percent in AFS each. Punjab National Bank holds 91 percent in HTM and 9 percent in AFS.
Among private banks, ICICI Bank and HDFC Bank hold 78 percent and 22 percent each in HTM category and AFS category, respectively.
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Movement in G-Sec yield
The yield on the 10-year benchmark bond has eased in the last few weeks with the end of borrowing through government securities in the current financial year. The 10-year benchmark 7.26 percent 2032 bond yield is now trading at 7.3289 percent, compared with 7.4623 percent on February 28.
The fall in yield is attributed to good buying at 7.40-7.45 percent, dealers said.
Bond yield and prices move in different directions.
Similarly, yield on these bonds remained mostly in a narrow range towards the end of the third quarter of the current financial year. The yield on benchmark bond traded in the range of 7.28-7.33 percent in December 2022.
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H1 borrowing expectation
Most dealers expect the government to conduct 59-60 percent of its borrowings announced in the budget in the first half of the next financial year.
“We expect the government to frontload 60 percent of the total borrowing in the first half of next fiscal year,” said Ritesh Bhusari, deputy general manager, treasury, at South Indian Bank.
“We expect around 57-58 percent of frontloading in the first half of next fiscal year, slightly lower than the previous year’s borrowing in same period, because most market participants has requested lower frontloading,” said Bansal.
Finance Minister Nirmala Sitharaman during her budget speech said the Centre will borrow a record Rs 15.43 lakh crore from the market in 2023-24 to finance its fiscal deficit of 5.9 percent of gross domestic product.
The gross borrowing target for next year is 3.2 percent higher than this year's budget estimate of Rs 14.95 lakh crore.
As such, the gross borrowing programme for 2023-24 is 8.6 percent higher than what will be borrowed in 2022-23.
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