Banks take gilt-edged hit in profitability

The combined net profit of eight banks declined by 7.86 per cent during the quarter ended September 2004. This is at a time when India Inc in general posted a significant rise in profits for the quarter.

Other banks, including the SBI, Bank of India, BoB and others, are expected to show a similar trend.

How did this happen? When interest rates on gilts firmed up in the last six months, the value of gilts in the portfolio of banks depreciated. It’s mandatory for banks to include investment income on a quarterly basis. Most of the banks hold gilts in AFS (asset for sale) or MTM (mark-to-market) categories.

Recently, the RBI stepped in and allowed a one-time relief of converting their gilt asset portfolio to the HTM category, where losses are not calculated on a quarterly basis.

However, many banks took a hit while converting their gilts from AFS or MTM to the HTM category. This is now reflected in their balance sheets. “The rise in gilt rates and the fall in bank profits point to the rising interest rates in the country,” added an analyst.

In fact, once-bitten-twice-shy banks are not going after gilt investments in a big way. The growth in investments of banks declined to Rs 21,005 crore during the last six-month period from Rs 82,092 crore in the same period of last year. The total investment of banks amounts to Rs 6,98,593 crore.

On the other hand, the ‘gilt losses’ will prompt many banks to focus more on credit offtake instead of parking funds in gilts. Non-food credit of the banking system shot up by a record Rs 88,942 crore in the first six months of 2004-05 as against a rise of Rs 21,190 crore last year.

The Q2 results tell the story (See table). For instance, UTI Bank posted a 28 per cent fall in net profit to Rs 46.2 crore during the second quarter ended September 2004. The bank recorded a trading loss of Rs 94.85 crore in Q2 as against a trading profit of Rs 101.91 crore. “We’ve transferred government securities amounting to Rs 3,377 crore to the HTM (held-to-maturity) category,” said an UTI Bank official.

Corporation Bank has reported a 81 per cent drop in its net profit at Rs 27.39 crore for the second quarter ended September 2004. K Cherian Verghese, CMD of Corporation Bank attributed the fall to loss of profits on sale of government securities — from Rs 177 crore to Rs 54 crore.

Ditto for ICICI Bank, the second-largest bank in India. ICICI Bank witnessed only a 10 per cent growth in net profit as its income from investments (trading profit) declined 73 per cent to Rs 123 crore. Syndicate Bank’s second quarter profit fell by 34 per cent to Rs 75.6 crore due to the same reasons. The bank incurred a depreciation of Rs 315 crore when it transferred govt securities to the HTM category.