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India financials - RBI provides relief on bond losses - Standard Chartered Securities
Posted On : 2013-08-21 21:40:07( TIMEZONE : IST )
On 20 August, the Reserve Bank of India (RBI) announced measures aimed at 1) providing relief to banks from bond losses, and 2) lowering long-bond yields.
RBI will allow banks to transfer SLR (government securities) from the AFS (available for sale) to the HTM (held to maturity) category, based on bond prices of 15 July. The 10Y bond yield, which is trading at 8.9% today, was trading at a much lower yield of 7.56% on 15 July, and 7.46% on 30 June. This special dispensation is solely for SLR/government securities, and not for corporate bonds or other investments.
RBI maintained the maximum permissible limit for HTM at 24.5% of the banks' net demand and time liabilities. Earlier, RBI had asked the banks to progressively bring HTM down to 24.5% of NDTL.
RBI has also allowed banks to spread MTM losses over the rest of the year, rather than book them entirely in one quarter.
IER believes these measures should be positive for state banks, which would otherwise have booked major bond losses in 2QFY14. If these measures had not been announced, IER estimates that many state banks would have been forced to book bond losses equal to two quarters of profit. With these measures, losses should be substantially reduced.
BoB, Boi, ICICI Bank, HDFC Bank, and IndusInd continue to hold the best-hedged bond portfolios, in IER's view, with an earnings impact of less than 10%. The biggest gainers from RBI's moves should be Allahabad, OBC, Canara and PNB. While these banks will still record high bond losses, they will now be much lower than expected. Axis and Yes, which hold large corporate bond books, will not benefit from RBI's new measures.
While this development is short-term positive, and IER expects a bounce-back among state-owned banks, it is still concerned over long-term asset-quality issues. ICICI Bank is IER's top sector pick, followed by HDFC Bank and BoB. Trading stocks based on the RBI's initiatives include Allahabad, OBC, and PNB.
