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Banks bullish on debt

Sep 6, 2001

The BSE Sensex has come down by 9% since the beginning of the fiscal year. As a result one could assume deterioration in the investment portfolio of private sector banks. But contrary to our belief, banks have shifted their focus to the debt markets to maintain the yield on investments. Banks investment in equities formed a relatively small proportion of their total investment portfolio in FY01. Except Global Trust Bank, almost all the private sector banks have investment in shares less than 5% of their total investment amount. With increasing liquidity in the debt markets and improving prospects, banks are parking their funds in government securities. As on March '01, scheduled commercial banks held 35% of their net demand and time liabilities in SLR securities as compared to the 25% statutory requirement. On the other hand, private sector banks have increased the proportion of debentures and bonds in their total investment portfolio compared to government securities. This is due to the higher returns offered by privately placed debt.

Investment mix
ParticularsICICI BankHDFC BankUTI BankIDBI BankGTB
Government securities49.8%47.8%57.8%46.5%58.8%
Shares1.5%2.8%4.6%5.1%8.8%
Debentures & bonds37.5%36.1%24.4%45.2%30.8%
Others10.7%13.2%13.2%3.1%1.5%
Total100.0%100.0%100.0%100.0%100.0%

Most of the banks derive nearly 50% of their total income from investment income. Their concentration on debt markets has enabled them to generate higher yield on investments in FY01. However, for ICICI Bank, yields are lower, as only one month of Bank of Madura's income statement was merged with the ICICI Bank as on March '01. On the other hand, the balance sheet reflected full year's assets & liabilities.

The RBI has already indicated a softer interest rate regime, which is likely to keep the bond prices higher, resulting in capital appreciation in the banks' portfolio. But in the long run, several factors such as rise in inflation, fall in forex reserve, change in government borrowings program could lead to a stable interest rate environment. This in turn could lead to a diminution in investment portfolio of banks (fall in bond prices). Nevertheless, in the long term with a pick up in the lending opportunities, banks are likely to shift their focus again to corporate lending. This is likely to compensate them for the loss of returns in investment.

Yield on investments
YearICICI BankHDFC BankUTI BankIDBI BankGTB
FY016.8%8.9%8.9%12.6%9.7%
FY009.3%6.4%7.6%11.1%8.4%
FY997.3%9.6%10.6%8.9%9.2%

The banking system is currently flooded with funds. With less lending prospects, banks are parking their excess funds in the debt market. During the first quarter of FY02, total deposits of banks grew by 19%. The uncertain state of capital markets and the UTI crisis have contributed to this deposit growth. Household savings in shares and debentures is dwindling. In FY01, it was just 0.3% compared to 0.8% in FY00. The declining ratio clearly reflects the loss of confidence in the capital markets.

Although, the Sensex is trading below 3,300 mark, selling pressure at higher levels trims the rally. Near term trigger for the market could come from hastening the disinvestment process and improvement in infrastructure spending.

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