PSU, Private Banks Report Higher Gains In HTM Bonds In H2FY25

Government and private sector banks reported their profits from their held-to-maturity (HTM) portfolios of bonds rising by 60 per cent during the second half of the financial year 2024-25. This is mainly because of the fall in the bond yields, increasing the market value of government bonds and other fixed-income securities in these portfolios.

According to data gathered from regulatory filings and industry surveys by Moneycontrol, returns on HTM investments were much higher in the second half compared to the first half of the year. Most banks classify most of their holdings of bonds as HTM, which are not generally marked to market. However, changes in interest rates affect the unrealised gains recognised in those holdings.

Bond Yields Fall, Prices Rise

The Reserve Bank of India's (RBI) cessation of interest rate hikes and anticipation of future easing led to a fall in government bond yields. As the price of bonds moves inversely to yields, this fall in yields helped raise the value of the bonds banks hold under the HTM category.

In addition, surplus liquidity in the banking system and demand for government papers were also favouring the bond rally in the latter half of FY25. Subsequently, banks that had possession of long-term paper gained on their paper, although they did not desire to sell off their assets.

Impact Across Bank Categories

The public and private banks both benefited from the trend. The state-owned banks are said to have posted better gains, considering that they typically carry a bigger percentage of HTM securities on their books. The private banks, while having more diversified portfolios, also posted good gains based on their exposure to high-quality debt instruments.

The improvement in HTM portfolio values has provided some alleviation to banks' aggregate treasury earnings. This is when credit growth is being supported, yet net interest margins are under pressure from increasing deposit costs.

While HTM portfolios themselves are not necessarily tied to the revenue from trading, the increase in their value reflects stronger financial stability and lends credibility to banks' attempts at strengthening their balance sheets. However, the profit will not be realised until bonds are sold or reclassified.

As a result, bond markets are likely to remain responsive to policy signals and global events, so long as the dynamics of HTM portfolios will still be influenced by trends in interest rates and inflation expectations.