Bank Treasury Gains Likely to Slow in Q2 After Strong Start

Quick Summary

• Banks, which saw important treasury gains in Q1 due to falling yields and Open Market operations (OMOs) by the Reserve Bank of India (RBI), may face muted profits in Q2.
• The 10-year bond yield rose from 6.25% in Q1 to 6.60% in Q2, reducing bond investment earnings as yields and bond prices are inversely related.
• RBI did not conduct any OMOs in Q2, compared to ₹2.4 lakh crore worth of OMO purchases in Q1 that boosted banks’ earnings.
• Shifting securities from Held-To-Maturity (HTM) books to Available-for-Sale (AFS) helped banks book profits during lower yield periods; however, this option is less available now.
• Treasury gains for major banks such as Axis Bank (+245%), ICICI Bank (+103%), Bandhan Bank (+696%), and others saw significant increases year-on-year in Q1.
• Analysts like Anil Gupta of ICRA predict lower treasury profits or potential mark-to-market losses for some institutions in Q2 due to unfavorable market dynamics.

Indian Opinion Analysis

The anticipated decline in treasury gains indicates a shift towards tighter financial conditions for Indian banks following a robust first quarter. This progress highlights the dependency on external factors such as OMOs and yield movements for sustained profitability within banking treasuries. While Year-on-Year credit metrics had already shown pressure earlier, the absence of active RBI intervention through OMOs amplifies challenges heading into the second fiscal quarter.

For banks with more agile treasury management capabilities, this phase could serve as an opportunity to showcase resilience amidst tightening market scenarios.However, broader implications include possible impacts on overall financial stability metrics or lending capacities if profitability pressures intensify further across sectors influenced by high-yield environments.Read More