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Rising yield curve could weigh down on banks' profitability: Ind-Ra

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New Delhi | Wednesday, 2021 10:15:06 PM IST
The expected pressure on long-term yield curve triggered by rising inflation trend could impact the profitability of the Indian banking system.

Accordingly, a 100 basis points (bp) upward shift in the yield curve could impact the pre-provisioning operating profit (PPOP) of public sector banks (PSBs) by 8 per cent and that of private banks by 3.2 per cent; for the overall banking system, the impact could be 5.8 per cent.

"The 100bp movement in the yield curve would impact the common equity Tier 1 of PSBs by 28bp and that of private banks by 13bp; while for the overall banking system, the impact could be 22bp YoY," India Ratings and Research said in a report.

"This has been taken on a post-tax basis, without considering the banks' ability to reclassify their trading book and a likely partial offset from lower pension costs," it added.

On analysing the past interest rate cycles, Ind-Ra observed that there have been three cycles of a yield curve expansion FY05 onwards, showing a strong inverse correlation between treasury income and interest rate movement.

Furthermore, the sensitivity seen for PSBs was much higher than that for private banks.

Besides, it said that while credit offtake remained muted since FY17, banks have been maintaining a balance between holding higher statutory liquidity ratio (SLR) and carrying interest rate risk, also taking risk by giving out loans in a falling interest rate environment.

"Post the first Covid wave, the RBI has further extended the dispensation of allowing banks to hold more than 25 per cent of their total investments under the held for trading investment category, subject to them holding up to 22 per cent in the form of SLR securities," the report said.

"While the limit for holding SLR securities had already been increased to 22 per cent from 19.5 per cent earlier, the RBI in its February Monetary Policy Committee meet has further extended the window for these holdings till March 2023 and a phased wind down thereafter by December 2023," it added.

--IANS rv/sn/arm

( 352 Words)

2021-07-21-16:28:02 (IANS)

 
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