The profitability of public sector banks would decline by over 40 per cent by 2005-06 due to re-pricing of the government securities portfolio, credit rating agency Crisil said.
"In our recent study, we have found that over next four years, almost 85 per cent of the banks' investment portfolio would be replaced by new, lower-yielding investments. This could impact investment yields by around 300 basis points, a Crisil release said on Monday, quoting director (financial sector ratings) G V Mani.
"While deposit costs would also fall, this decline will be lower at around 227 basis points, implying a narrowing of this spread by 73 basis points," he said.
Crisil warned that the recent budgetary proposal to buy back some of these G-secs could further accelerate their decline.
"This decline in interest rates is not yet fully reflected in the banks' investment income, which continues to accrue at the historical high yields. Thus, its impact is not yet reflected in the banks' profitability," it added.
This would translate into a 30 basis points decline in the banks' pre-tax return on assets since the investment portfolio constitutes around 40 per cent of the banks' asset side.
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