C. Shivkumar

Higher loan provisioning, depreciation losses main reasons

Bangalore , June12

Increased loan provisioning and depreciation of investments are likely to hit the bottom lines of several public sector banks in the first quarter of the current financial year.

Banking sources said some were likely to show losses in Q1 despite the big improvement in net interest margins. Net interest margins, difference between gross lending and gross borrowing rates, are currently averaging upwards of 4 per cent for most of them. The high margins were largely on account of the pool of low cost long-term resources that public sector banks historically enjoy.

Yet, the bankers said, this quarter they would have to take losses or shrink their net profits. The hike in provisioning to 1 per cent on standard assets would show up on the Q1 FY06 bottomlines. Provisioning was hiked 1 per cent in the last Credit Policy. This would imply that some more below-the-line charges would have to be created out of the surplus, impacting net profits.

One time cost

This is expected to be a one-time cost, because all future loan sanctions would have this component loaded on their pricing, bankers said. Besides, a few banks have also suffered deterioration in some of their housing loan assets. Some banks already have the cushion of floating provisions for meeting this additional requirement, though this is unlikely to be sufficient. Bankers said that some of the additional provisioning would likely get written back as recoveries and rehabilitation of non-performing loans, though this was likely to be used to reinforce the capital.

Besides, they would also have to provide for large depreciation and amortisation. The depreciation was on account of the hardened yields during the quarter. The five-year yield to maturity is already up 50 basis points from the end of the last financial year, at 7.46 per cent. The five-year YTM has been taken, since almost all the banks have shrunk their average tenor of their securities to five years and below, bankers said.

Transfer to HTM

But some of the bankers are moving all their outstanding securities to the Held to Maturity (HTM) category as permitted by the RBI. Under the RBI's guidelines, banks are allowed to have up to 25 per cent of their demand and time liabilities as HTM. Some banks have not yet taken advantage of this provision and are making moves to shift to the HTM category. Vijaya Bank has transferred at least Rs 1,300 crore of securities to the HTM category.

However, in making this shift, banks are expected to amortise the acquisition cost, since the transfers have to be made at market value. In most of the cases banks are expected to incur substantial losses, depending on the size of the marked to market portfolios (the marked to market included both held for trading and available for sale securities). In making this transfer to HTM, bankers said that they would be insulating their securities from future depreciation.

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