RBI moves, Covid helped PSU banks report first profits after five years

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Ratings agency ICRA estimates 12 public banks booked profits of Rs 31,600 crore from their bond portfolio compared to overall PBT of Rs 45,900 crore in FY2021.

Synopsis

PSU banks reported net profits in FY2021 after five consecutive years of losses, supported by windfall treasury gains, an analysis shows. Higher gains were recorded on the back of relatively higher SLR holdings compared to private banks.

By Shubham Raj, ETMarkets.com

Jun 21, 2021, 02:50 PM IST

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NEW DELHI: If the public sector bank stocks in your portfolio have delivered superb earnings for the last financial year, a large part of the credit goes to the Reserve Bank of India and the Covid pandemic, and not their improved performance.

PSU banks reported net profits in FY2021 after five consecutive years of losses, supported by windfall treasury gains, an analysis shows. Higher gains were recorded on the back of relatively higher SLR holdings compared to private banks.

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Ratings agency ICRA estimates 12 public banks booked profits of Rs 31,600 crore from their bond portfolio compared to overall PBT of Rs 45,900 crore in FY2021
Excluding State Bank of India, profit from sale of bonds exceeded the profit before tax number of other public banks. The bond gains also exceeded government capital infusion of Rs 20,000 crore in FY2021.

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The repo rate and the reverse repo rate were cumulatively cut by 115 bps and 155 bps, respectively, during March 2020 and May 2020 to 4 per cent and 3.35 per cent, respectively, by May 2020.

With a year-on-year (YoY) deposit growth of 11.4 per cent and muted credit growth of 5.5 per cent in FY2021, the liquidity in the banking system remained abundant at Rs 5-7 lakh crore in FY2021.

With rate cuts and abundant liquidity, the daily average for the benchmark 10-year government securities declined from 6.42 per cent in Q4FY20 to 5.90 per cent in Q3FY21 before rising to 6.06 per cent in Q4 FY2021. The significant volatility in bond yields also provided banks with ample trading opportunities.

In short, if the rate cuts have not been substantial, the public banks could have delivered another poor year.

“As the banks booked gains on their bond holdings, their fresh investments are closer to the market rates, thereby aligning the yield on their bond portfolios closer to the market rates. The yield on the investment book for the public banks declined to 6.18 per cent in Q4FY21 from 6.79 per cent in Q4FY20,” said Anil Gupta, Vice President – Financial Sector Ratings, ICRA.

However, as the scope for further rate cut is limited with the possibility of a reversal of the policy stance after January 2022, the incremental gains could be modest in FY22, he said.

Analysts said apart from trading gains, the return to profitability was supported by lower credit provisions on their legacy non-performing assets (NPAs), after the high provisions made during the last few years.

Like public banks, private banks saw an improvement in their trading profits to Rs 18,400 crore in FY21 (Rs 14,700 crore in FY20), which was 21 per cent of their PBT in FY21 (28 per cent in FY20).

“While banks make windfall profits amid the declining yield scenario, they could face challenges in their bond portfolios in a rising interest rate regime. While the RBI is unlikely to be in a rush to hike interest rates in the near term, banks would need to be mindful as treasury profits would be relatively muted in FY22,” said Gupta.