Govt bonds may leave a Rs 450-cr blot on SBI books

The government’s decision to preserve its shareholding in the State Bank of India (SBI) through a special bond issuance might cost the country’s largest bank a mark-to-market loss of up to Rs 450 crore. In the last week of March, the central government issued special bonds worth Rs 9,996 crore to SBI for subscribing to its share of the Rs 16,736.31-crore rights issue.

The bonds were issued at a yield of 8.35% for a 16-year tenor, maturing in 2024. However, few days after the bonds were issued, bond prices fell (and yields rose) amid higher inflation and fears of a tight monetary policy. This caused the benchmark paper, the 7.99% bond maturing in 2017, to end the financial year at 7.94%, as against market expectations of 7.75%.

Given SBI’s huge deposit base, it also attracts huge investments in government bonds in order to comply with statutory liquidity requirement. Here again, if the bank had large positions in longer-tenor bonds, the mark-to-market valuation of these securities would cause a hit. Most banks have suffered an m-t-m loss due to a drop in bond prices.

Every year, the Fixed Income, Money Markets and Derivatives Association (Fimmda) declares the yield-to-maturity for all tenors on March 31. Bond yields were seen hovering around 7.8% levels for most of 2007-08, and it is only after December 2007 that bond yields slipped sharply.

However, over the past few days, thanks to the rising inflation and tighter cash conditions, bond yields have once again inched closer to the 7.7% mark. Market participants were of the view that Fimmda could set the yield-to-maturity at around the 7.75% mark.

Correspondingly, Fimmda set the benchmark yield for government bonds maturing in 2023 at 8.37%. Following this, SBI had to mark-to-market these bonds at a yield of 8.87% — 50 basis points over 8.36%. Treasury officials pointed out that this valuation exercise could have caused SBI a loss of up to Rs 450 crore, given the issue size of Rs 9,996 crore.

Speaking to ET, SBI chief general manager (treasury) Anjan Barua said, “We are still in the process of compiling our books of accounts. It is rather premature to speak about the mark-to-market valuation. We have not taken any decision about transferring the bonds to the HTM (held-to-maturity) category and we do have the entire year to do so.”

A senior trader with a bond house explained that SBI now will have to wait for market conditions to improve, in order to sell these bonds in the market. Given the current circumstances, wherein most market participants expect the central bank to hike the cash reserve ratio, yields are only expected to harden from here on.

SBI could also look at transferring these bonds to the HTM category (where it will be spared of the MTM hit). However, there is an upper limit of 25% for banks transferring bond holdings to the HTM bucket.

STCI Primary Dealer’s MD, Pradeep Madhav, said, “Markets went into a tizzy on the last day of trading due to news of rising price levels. After the onset of the new fiscal, there was a brief euphoria, yet yields continued to be on a hardening spree. Going forward, the bond supplies are likely to grow, with the commencement of the new borrowing programme.”