Banks’ treasury gains to improve in Q1

Banks are likely to report mark-to-market (MTM) gains on investment portfolios in the April-June period of the current fiscal year as Government bond yields softened sharply after surging in the preceding quarter, analysts said.

However, these gains’ influence on profitability is expected to be limited because of the accounting treatment of investments, according to the analysts.

“The yields softened in Q1 FY2027 after having risen sharply towards the end of Q4 FY2026. Consequently, banks are expected to witness mark-to-market (MTM) gains on their investment portfolios. However, the impact of same on profitability may be only partial, as fair value changes on investments classified under the Available for Sale (AFS) category are recognised directly in net worth,” said Sachin Sachdeva, Vice President, Sector Head, Financial Sector Ratings at ICRA.

The benchmark 10-year Government bond yield witnessed a sharp reversal over the two quarters. During the January-March 2026 quarter, the yield rose 0.45 per cent from 6.582 per cent at the start of January to 7.035 per cent at the end of March, with a sharp sell-off in the last week of March pushing the benchmark above the 7 per cent mark.

This was mainly because of rising oil prices amid the West Asia crisis, which directly feeds into domestic retail inflation and widen the trade and current account deficit.

The trend reversed in the April-June 2026 quarter, when the benchmark yield declined 0.38 per cent, falling from 7.133 per cent at the beginning of April to 6.750 per cent at the end of June. While yields remained elevated and volatile through April and May, they eased steadily during June to end the quarter at their lowest level, reversing the sharp hardening seen in the previous quarter.

Experts said the reversal in bond yields was due to easing geopolitical tensions and policy support from the Indian banking regulator and the Indian government, which led to an increase in foreign flows into Indian bonds.

The decline in yields is expected to result in MTM gains on banks’ investment portfolios. However, the improvement in reported profitability may be only partial, as fair value changes on investments classified under the Available for Sale (AFS) category are recognised directly in net worth instead of being routed through the profit and loss account, Sachdeva said.

Apart from actual gains or losses realised during the quarter, the extent of treasury income will depend on the composition of a bank’s investment portfolio across different investment categories. Based on the classification of investments, fair value changes are either recognised through the profit and loss account, contributing to treasury income, or directly in net worth, thereby limiting their impact on reported earnings, he added.

According to brokerage reports, banks are set to deliver profit growth in the range of 9-14 per cent year-on-year, due to robust loan growth and lower provisioning costs.

The long-sought surge in deposit growth and expansion of net interest margins are likely to be elusive in the June quarter as well.

Deposit mobilisation continues to remain a challenge for lenders as loan growth outpaces deposit accretion. Banking system credit expanded 17.7 per cent year-on-year as of June 15, 2026, while deposit growth stood at 12 per cent, pushing the system credit-deposit ratio to around 83.4 per cent.

Analysts said competition for retail deposits remains intense, forcing banks to rely more on wholesale deposits even as term deposit rates stay relatively sticky.

In the provisional numbers, the pressure on the low-cost deposits of state-owned banks was visible with Union Bank’s CASA ratio declined marginally to 35.10 per cent from 35.51 per cent a year ago, while Central Bank of India’s CASA ratio fell to 46.61 per cent from 46.88 per cent.

Indian Bank’s domestic CASA ratio also eased to 39.64 per cent from 39.67 per cent at the end of March.