Due to rising bond yields, banks will report mark-to-market losses of Rs 13,000 crore.

According to research released on Tuesday, rising bond yields may compel banks to disclose mark-to-market losses on their investment portfolios of up to Rs 13,000 crore in the April-June quarter. According to a forecast by domestic rating agency Icra, profits will decline for the quarter, but increased loan growth and operating profitability will guarantee that the banks’ bottom lines stay “stable” for FY23.

At present, banks are also facing a lot of problems to get insurance. Besides, it is taking a long time to get loans.

In FY23, the system is expected to post an incremental credit increase of 10.1%–11%, or Rs. 12–13 lakh crore.

Because banks hold more government assets in their investment portfolios, particularly those with longer tenors, rising bond yields are detrimental to their profitability.

According to the research, public sector banks will incur MTM (Mark-To-Market) losses on bond portfolios of Rs 8,000–10,000 crore while private banks will incur MTM losses on bond portfolios of Rs 2,400–3,000 crore in Q1 FY23.

Despite these anticipated MTM losses, Icra vice president Anil Gupta stated, “We expect the net profits of the banks to stay stable given the predicted growth of 11–12% in their core operating earnings in FY23, which will more than outweigh the MTM losses.”

Gupta, however, added that there might be a sequential slowdown in net profits in FY23 if the yields significantly stiffen going forward.

Contrary to the customary tendency of negative incremental credit during that period in the past, the incremental credit growth for banks has stayed notably positive in Q1 FY23, it said, adding that growth was supported across all segments.

Corporate bond issuances fell to their lowest level in four years in Q1 FY23 as a result of rising bond yields and declining investor demand for corporate bonds, the report stated. This caused major borrowers to switch from the debt capital market to banks for their funding needs.

Although the agency acknowledged that rising interest rates may eventually restrict credit demand, it still anticipates that the system would end FY23 with a credit growth of up to 11% as opposed to 9.7% in FY22.

Given that 43% of banks’ floating rate loans are connected to external benchmarks and that 77% of their loans are floating, rate transmission is anticipated to be faster for banks in this cycle.

This will help the improvement in the operational profits of banks, along with the lag in the upward repricing of deposits and improved credit growth, it was said.

According to the agency, slippages could remain moderate and at 2.5–2.7% of standard advances in FY23 as a result of declining bounce rates and past-due loans at the majority of banks. The agency also predicted that the gross non-performing asset (NPA) ratio would increase to 5.2–5.3% by the end of March 2023.

The stressed assets (net NPAs and standard restructured loans) were at 3.8% of standard advances as of March 31, 2022, despite the headline asset quality metrics improving.

It maintained a “stable” prognosis for banks for FY23 based on consistent profitability, improvements in asset quality, and capitalization.

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