‘HTM bond sales to hurt banks, but not as badly as in U.S.’
New Delhi, May 30, 2023
Moody’s says lenders across Asia including in India could face large losses due to monetary tightening on HTM portfolios; slower and lesser interest rate increases in region, however, may help curb losses
Banks in countries such as India, where lenders hold a significant chunk of government securities till maturity, could face large losses owing to tightening monetary policy, but the lesser extent of interest rate increases in the Asia-Pacific region may help curb such losses, Moody’s Investors Service said in a report on Tuesday.
“In Bangladesh, China, India, Mongolia, the Philippines, and Taiwan, banks hold sizable volumes of HTM (held to maturity) securities. They are carried at amortisation costs, without reflecting their current market values, unless a bank decides to sell them,” the credit rating firm said.
Such securities’ sales could lead to “a large loss if their current market values are substantially lower than their acquisition costs”, Moody’s cautioned, but noted it did not expect losses to be “significant because increases in interest rates… have been less significant and less rapid than to those in the U.S.”.
Noting that most HTM security holdings at banks in these countries’ were of domestic government securities that banks can use for repos with central banks, the rating agency said these banks generally had substantial buffers against risks from sudden shifts in investor sentiment, with liquid assets exceeding market borrowings in most banking systems.
“We also expect central banks in Asia-Pacific to continue to be proactive in providing liquidity for banks to prevent near-term liquidity stress that can result from a sudden change in economic conditions,” it noted.
“Banks globally are facing a tightening of liquidity amid tighter monetary policy, outflows of excess liquidity built up during the coronavirus pandemic into more profitable investments and increased risk aversion among investors because of stress in the U.S. banking sector,” the global rating major said in a note on banks in the Asia-Pacific titled ‘Impact of liquidity tightening will be limited as stable deposits underpin funding’.
[The Hindu]
