Surging bond yields likely to slash banks' treasury income

Mumbai banks anticipate a significant 60% drop in treasury income for the July-September quarter compared to the previous year, owing to soaring government bond yields, according to analysts from Jefferies. The fiscal second-quarter treasury gains are projected at ₹5,500 crore, a steep decline from the ₹13,100 crore earned in the same period last year.

Quarterly income is also expected to be 23% lower than the ₹7,100 crore generated in the June quarter. Over the past quarter, the benchmark 10-year government bond yield surged by 44 basis points, closing at around 7.19%, up from roughly 6.75% three months earlier. In contrast, five-year yields jumped by a more substantial 47 basis points.

The sharp increase in yields has reversed the bond rally witnessed in the first quarter, reducing the scope for mark-to-market and trading gains on banks' investment portfolios, which constitute a substantial portion of treasury income. Consequently, profit growth during the September quarter is expected to remain muted as bond yields have remained high, according to Nitin Aggarwal of Motilal Oswal.

Bankers attribute the projected sharp year-on-year decline in treasury income to a high base, as lenders had secured substantial gains on their bond portfolios during the second quarter of the previous fiscal year. However, unless yields ease from the current levels, treasury income is unlikely to offer the same earnings support witnessed in the preceding year.

Profit growth will increasingly need to stem from core lending income, fee income, and contained credit costs, as stated by a senior treasury official at a private sector bank. Public sector banks, with their larger portfolios of government securities, are anticipated to be more adversely affected, having benefited more from treasury gains when bond yields declined in earlier quarters.