Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

The same fixed-income market that's bringing pain to global banks may turn out to be the palliative in at least two large Asian economies this year.

Even as Goldman Sachs cuts 5 percent of its bond trading workforce, following Morgan Stanley's fourth-quarter decision to let go a quarter of its fixed-income staff, lenders in India and Indonesia are banking on strong gains from buying and selling securities, mostly government notes. The goal is to earn enough trading profit to tackle their overhang of souring corporate debt. Non-performing loans may rise to between 3 and 4 percent of total Indonesian loans, from 2.7 percent in November, according to Standard & Poor's. In India, stressed assets, including restructured loans, are already in excess of 11 percent of outstanding credit. 

Enter bond trading as savior. With the monetary authority in Mumbai cutting its policy rate by 125 basis points last year, lenders including State Bank of India and Kotak Mahindra Bank saw an 87 percent increase in their trading profit to about $6.5 billion. Bank Central Asia and other Indonesian lenders posted a 40 percent rise to $550 million:

Profit Savior
Banks are making more money on securities portfolios as interest rates decline
Source: Bloomberg
*Aggregate trading profit for 32 Indian and 25 Indonesian listed banks

Expect Indonesian institutions to do even better this year, especially as moderating inflation allows the central bank to cut interest rates more aggressively than investors currently expect. Buyers are flocking to the country's near 8 percent, 10-year sovereign bond yield. An index of Indonesian sovereign bonds has returned 6.4 percent so far this year. Among 30-odd local-currency bond markets in emerging economies tracked by Bloomberg, that's the second-best performance after Brazil.

Top Five
Year-to-date returns on local-currency sovereign bonds
Source: Bloomberg

India, however, is near the bottom of the returns pile, with foreign investors pulling out more than $1.1 billion so far this year from the country's bond market.

To prevent a rout, Prime Minister Narendra Modi's government recently promised to quicken the pace of fiscal consolidation. But economists believe it will be a hard slog, and therefore their median estimate is only for a 25 basis point interest rate cut by the end of this year. If the consensus view turns out to be too pessimistic, investors will return to Indian bonds. And that will be a huge relief for commercial banks. 

With Indian lenders garnering as much as 63 percent of their profit from trading in 2015, investors' vote of confidence should translate into both a higher capacity to absorb losses from bad debt and an opportunity to expand credit by lowering lending rates. 

Interestingly, both Indonesia and India have announced tax amnesty programs, which should shore up deposits in their banking systems. Add to that the recent decision by the Financial Services Authority in Jakarta to lower the ceiling on what lenders can pay for deposits, and it's quite likely that funding costs for banks there would fall. That will be welcome news for the industry.   

There's a caveat, though. Optimism about banks' trading profits could dissipate if in response to higher U.S. interest rates, the rupee and the rupiah swoon, and investors balk at holding Indian and Indonesian debt, both corporate and sovereign. For now, however, the risk is remote, and it appears that the fixed-income fix for banks might just work.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Andy Mukherjee in Singapore at

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Matthew Brooker at