Given the sharp increase in interest rates since 15th July 2013, banks (especially SOE banks) were sitting on big MTM losses on their
government bond books. RBI has now allowed banks to do the following:
1. It has allowed banks to keep SLR bonds in HTM at 24.5% of net liabilities (NDTL) until further notice (against earlier requirement of 23% over time).
2. Banks will be allowed to shift SLR bonds to HTM (up to 24.5% of NDTL) from AFS as a one time measure. Moreover, banks can shift these bonds at prices as of 15th July – the date of first RBI action
3. Moreover, if banks have any losses on remaining AFS bonds, they can spread it over next 3 quarters.
This would have taken out a lot of equity from the already capital starved SOE banks sector. This move by the RBI is an attempt to reduce the capital hit.
This move makes the book value of these banks [Bank of Baroda, Bank of India, SBI, PNB, Canara Bank and union Bank] even more opaque – structurally this will hurt SOE bank stocks. If these stocks go up following this move, our view would be to reduce positions in the sector.
