Banks are expected to report a nearly 60% decline in treasury income for the July-September quarter due to sharp increases in government bond yields. According to analysts at Jefferies, aggregate treasury gains in the fiscal second quarter are estimated at ₹5,500 crore, down 58% from ₹13,100 crore a year earlier. Sequentially, this income is expected to be 23% lower compared with ₹7,100 crore in the June quarter. As reported by The Economic Times, the sharp decline reflects the significant impact of rising bond yields on banks' investment portfolios.
The benchmark 10-year government bond yield rose about 44 basis points in the past quarter, ending September at around 7.19%, compared with roughly 6.75% three months prior. As reported by The Economic Times, five-year yields climbed by an even sharper 47 basis points. Since yields move inversely to bond prices, the sharp rise has reversed the bond rally seen in the first quarter, when the 10-year yield fell about 28-32 basis points. This reversal has significantly impacted banks' investment portfolios and reduced the scope for mark-to-market and trading gains.
According to a report by 360 ONE Capital, higher crude oil prices and drought conditions in five states could pose risks to Indian banks' asset quality outlook, even as credit costs remain benign. The report highlighted that higher crude oil prices could add pressure to the operating environment for businesses and households, while uneven monsoon conditions and drought in five states could create challenges for borrowers. While asset quality and credit costs for both private and public sector banks continue to remain stable, investors are advised to monitor these external factors affecting borrowers' repayment capacity.
Despite treasury income challenges, the banking sector has seen an improvement in the balance between credit growth and deposit mobilisation. According to 360 ONE Capital, the gap between non-food credit growth and deposit growth narrowed to around 50 basis points in the second quarter of FY27, compared with around 500 basis points in the previous quarter. This improvement was supported by a pickup in deposit growth, backed by strong inflows under Foreign Currency Non-Resident Bank (FCNR(B)) deposits. The report expects healthy FCNR(B) deposit mobilisation to ease pressure on domestic deposit growth and improve the liquidity coverage ratio (LCR) of banks.
A senior treasury official at a private sector bank stated that unless yields soften from current levels, treasury income is unlikely to provide the kind of earnings support seen last year. The official noted that profit growth over the next few quarters will increasingly have to come from core lending income, fee income and contained credit costs. Against the changing interest rate environment, the report said the risk-reward favours large private sector banks, citing their strong balance-sheet growth, operating profits, superior return ratios and attractive valuations. However, the improvement in funding conditions may not fully protect banks from pressure on profitability, with net interest margins expected to compress in the second quarter of FY27 despite FCNR(B) inflows supporting net interest income growth.
