The banks are exposed to losses from the bonds' reduced investment value.
The rising yields of bonds and falling prices will negatively affect Indian public sector banks (PSBs) which are exposed to mark-to-market (MTM) losses from the government bonds' reduced value in their investment portfolios, Moody's Credit Outlook reports.
Here's more from Moody's:
This is especially relevant given that in the last few quarters, a large proportion of PSBs’ operating profit was derived from the profitable sale of investments, which also cushioned necessary high loan loss provisioning. Given the rising government bond yields in the past two months, we expect MTM losses to result in a significant decline in PSBs’ overall profitability because the banks will lose a key source of operating profit.
PSBs will have MTM losses on their government securities holdings. On average, our 10 rated PSBs (Indian Overseas Bank, Canara Bank, State Bank of India, Central Bank of India, Punjab National Bank, Oriental Bank of Commerce, Syndicate Bank, Union Bank of India, Bank of India, and Bank of
Baroda) invested 21% of their total assets in Indian government securities as of fiscal 2017, which ended 31 March 2017.
Over the past few quarters, the contribution of profits on the sale of investments to operating profits increased significantly, reaching more than 50% for some banks such as CBI and OBC. Our rated PSBs averaged a 41% contribution to operating profit from gains on the sale of investments in the quarter that ended 30 September 2017.
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