The ‘treasury’ has been the villain this time for South Indian Bank (SIB) whose net profit for the nine-month ending December 31, 2017 having witnessed a decline of almost one-third to Rs220.79 crore from Rs316.96 crore posted for the same period last year.
In fact, banks in general have made a windfall from their bond holdings last year as the interest rates (and hence bond yields) had been falling during the past couple of years pushing the bond prices up. The Reserve Bank of India (RBI) mandates the commercial banks operating in the country to keep a prescribed amount of government bonds or similar liquid financial instruments as part of their assets.
The SLR requirement over the years has fallen substantially – from 38.5 per cent of the net demand and time liabilities (NDTL) in early 1990 to 20.5 per cent as of now.
While the bank had generated an income of Rs108.66 crore through treasury last time, the same department has become instrumental in doling out a loss of Rs165.34 crore to the bottom line of SIB, one of the leading and the oldest banks in Kerala, the southern-most state of India.
The nearly 70 basis points spike in the bond yield during the past quarter has dented the valuation of the government securities holding of the banks parked in the available for sale (AFS) and held for trading (HFT) categories
The bank was required to make a provision to the tune of about Rs252 crores during the last quarter against the write-down in the net asset value of security receipts the bank has received against the assets sale to ARCs.
There were reports that while public sector banks have been on a shopping spree, private sector banks preferred to remain net sellers in the government securities market. However, banking sources in Kerala point out that most banks in the state opt not to disturb the GOI securities portfolio, which has been essentially built to address the Central Bank’s statutory liquidity ratio (SLR) requirements.
While the held to maturity (HTM) segment of the bond holding doesn’t attract any revaluation in relation to the price movement, the available for sale (AFS) and held for trading (HFT) baskets are required to be revalued to reflect the market prices and this process, in fact, leads to the banks booking profit or loss in the portfolio depending on the price movement.
The Reserve Bank of India (RBI) gives the banks one opportunity to reshuffle their bond portfolio – switching securities among the different categories of bonds. The banks are also allowed to sell securities from the HTM basket but only up to 5 per cent of the portfolio.