Sharp windfall gains for PSBs on bond portfolios due to COVID-19

New Delhi: The onset of Covid-19 resulted in windfall gains for public banks with trading profits on their bond portfolios rising sharply after the steep cut in policy rates by the Reserve Bank of India (RBI) in March 2020. 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 4.00% and 3.35%, respectively, by May 2020.

With a year-on-year (YoY) deposit growth of 11.4% and muted credit growth of 5.5% in FY2021, the liquidity in the banking system remained abundant at Rs. 5-7 trillion in FY2021. With the rate cuts and abundant liquidity, the daily average for the benchmark 10-year Government securities declined from 6.42% in Q4 FY2020 to 6.00% in Q1 FY2021, 5.93% in Q2 FY2021 and 5.90% in Q3 FY2021 before rising to 6.06% in Q4 FY2021. The significant volatility in bond yields also provided banks with ample trading opportunities.

On an aggregate basis, the 12 public banks reported a profit in FY2021 after five consecutive years of losses (FY2016-2020). 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.

Notwithstanding the profits reported by the public banks in FY2021, as can be seen in Exhibit 2, the profits before tax (PBT) of other public banks (excluding State Bank of India – SBI) were lower than their trading gains, reflecting the challenges posed by Covid-19 on the asset quality and profitability of the banks. Notably, the trading gains for public banks in FY2021 exceeded the capital infusion of Rs. 200 billion received from the Government of India (GoI).

Like public banks, private banks saw an improvement in their trading profits to Rs. 184 billion in FY2021 (Rs. 147 billion in FY2020), which was 21% of their PBT in FY2021 (28% in FY2020).