Softening G-Sec yields to boost PSBs' profitability: ICRA
According to ICRA the profitability of public sector banks (PSBs) has been under pressure over the last few quarters on account of mounting credit provisions following slippages in asset quality as well as increase in credit provisions on weaker assets.
June 12, 2013 / 16:33 IST
Softening G-Sec yields expected to boost PSBs' profitability in Q1, 2013-14, says ICRA
According to ICRA the profitability of public sector banks (PSBs) has been under pressure over the last few quarters on account of mounting credit provisions following slippages in asset quality as well as increase in credit provisions on weaker assets. While asset quality pressures are likely to keep the credit provisions high, the decline in the sovereign yield curve, as witnessed during April and May 2013, could boost PSBs' profitability in the current quarter (Q1). Yields on the benchmark 10-year Government securities (G-secs) declined by around 60 basis points (bps) in the first two months of 2013-14, prompting a sharp increase in G-sec trading volumes, which could also be attributed to churning of the investment portfolio with a view to shoring up the profitability indicators.Considering the decline in G-sec yields and the higher trading volumes, ICRA estimates the profit on sale of investments/reversal of depreciation on investments at Rs. 5,000-7,000 crore in Q1, 2013-14 (25-40 percent of the profit before tax, or PBT, of this quarter, as against around 15 percent of PBT in 2012-13 and almost negligible contribution to PBT in 2011-12).However, profit on sale of investments/reversal of depreciation in the remaining three quarters of 2013-14 could moderate, given that the drop in yields during the rest of the year could be muted (profit on sale of investments/reversal of depreciation could be 20-25 percent of PBT of 2013-14).ICRA has done a scenario analysis to estimate the contribution of trading profits at various levels of decline in yields, modified duration of investment book, and quantum of securities sale. According to ICRA's analysis, profit on sale of investments plus depreciation reversal could be in the range of 15-20 bps (of Average Total Assets, or ATA) in 2013-14, as against around 14 bps in 2012-13 and almost nil in 2011-12. Higher trading profits would be critical for banks in negating the impact of higher credit provisions (in case PSBs are required to reduce the Net NPA percentage from 2 percent as on March 2013 to 1-1.7 percent over next one year) or in absorbing the impact of the wage hike in 2013-14. In ICRA's estimate, PSBs would need to make a credit provision of 1-1.5 percent of ATA to achieve 1-1.7 percent net NPA levels by March 31, 2014; of this 10-15 percent could come from profit on investments/ depreciation reversal.
Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
Read More
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
