How treasury gains aided banks’ earnings in Q4

With the pandemic-led lockdown causing disruption in economic activity across sectors, weak credit offtake and significant fall in lending rates impacted the core performance of most banks in the March quarter. While the six-month moratorium on loans offered some respite on the asset quality front, keeping slippages at bay, higher Covid-related provisions made by few private banks weighed on their earnings.

But the sharp fall in yield on government bonds that led to treasury gains for banks during the March quarter has offered significant respite to earnings. The yield on 10-year G-Sec declined by a tidy 50-odd basis points in the January-March quarter. Most banks, hence, reported a sharp jump in profit from sale of investments during the March quarter. This aided their overall earnings, which could have been much weaker, had it not been for the tidy treasury gains.

SBI, for instance, reported flat net interest income (NII) in the March quarter, but the bank’s non-interest income grew by about 27 per cent, led by a six-fold jump in profit from the sale of investments during the quarter (compared to the previous year). Bank of Baroda, which reported a muted 5 per cent growth in NII, saw 74 per cent increase in profit from sale of investments; the bank reported a marginal profit during the quarter against the steep loss in the previous year. UCO Bank, which saw NII decline by about 3 per cent, reported more than three-fold increase in treasury income. The bank managed to report a meagre profit during the quarter.

Stepping up provisions

For most of the private sector banks, while core NII growth was much healthier, the bump up in treasury gains aided earnings that were otherwise under pressure owing to higher provisions. Most of the leading private banks have made additional provisions to tackle Covid-related stress in the coming quarters. Higher profits from sale of investments provided some buffer to absorb such huge provisions.

HDFC Bank reported a healthy NII growth of 16 per cent during the March quarter. But total provisions doubled (which included ₹1,550 crore of Covid-related provisions). The sharp 147 per cent jump in the bank’s profit from the sale of investmentsaided earnings. ICICI Bank reported 17 per cent growth in NII and 55 per cent increase in treasury income; the bank made Covid provisions of ₹2,725 crore.

Federal Bank, too, stepped up its provision cover significantly during the March quarter and made Covid-related provisions. The bank reported a five-fold jump in profit from the sale of securities.

Six-month moratorium

On the contrary, most PSBs saw provisions for bad loans fall significantly during the March quarter, on account of a high base (large provisions in the previous year), and lower slippages due to the six-month moratorium on loans. Unlike private banks, most PSBshave made much lower Covid-related provisions during the quarter. For instance, PNB has made bare minimum provision of 5 per cent on loans under the moratorium standstill benefit (RBI has mandated 10 per cent provisions on such accounts over two quarters beginning March quarter).

Sharp slippages on loans under moratorium (when it is lifted in September) and persisting weak core performance can put the earnings of PSBs under pressure in the coming quarters. Lower provision buffer to tackle the stress can make matters worse.

But with yields on 10-year G-Secs falling further by 20-30 bps in the April-June quarter, there could be some respite for earnings on account of treasury gains.