Mumbai: The risk of holding bonds of India’s banks is near a six-month low as the nation’s largest lender predicts interest-rate cuts will boost earnings growth.
The average cost of insuring the debt of State Bank of India and three other lenders fell 89 basis points this year, compared with a 104 basis-point drop for 172 financial institutions worldwide, according to data provider CMA. Investors seeking five-year contracts on the Mumbai-based lender needed to pay 315 basis points last Tuesday, compared with 169 basis points for Bank of China Ltd, the data show.
“An improved business environment, reduction in some of our loan rates and the impact of steps taken by policy makers has helped performance,” Diwakar Gupta, managing director and chief financial officer at State Bank, said in an August 17 telephone interview. “There is reason to believe that banks will be able to sustain the performance because sentiment is to revive growth momentum.”
State Bank doubled its net income last quarter and ICICI Bank Ltd’s profit surpassed forecasts as central bank Governor Duvvuri Subbarao cut borrowing costs for the first time in three years in April, and lowered lenders’ debt-holding requirements in July. Default risk for lenders including state-owned IDBI Bank Ltd and Bank of India is also dropping as slowing inflation gives policy makers room for measures to bolster the weakest economic growth in almost a decade.
“The banking sector is showing some resilience and that may persist as inflation and other economic pointers are showing a gradual easing,” said Mukesh Agarwal, president of research at Crisil Ltd, the Indian unit of Standard & Poor’s. “Monetary easing could happen soon and banks stand to benefit,” he said in an August 16 telephone interview.
The Reserve Bank of India cut its benchmark repurchase rate by half a percentage point in April to 8 per cent and has refrained from reducing it further on concerns the worst monsoon since 2009 will hurt farm output and increase food costs. Though the nation’s key inflation rate slowed for a second straight month in July to 6.87 per cent, it remained faster than 1.8 per cent in China, 5.2 per cent Brazil and 5.6 per cent in Russia.
Governor Subbarao kept borrowing costs unchanged in July for the second straight meeting while reducing the statutory liquidity ratio, or the proportion of deposits banks need to invest in government securities, by one percentage point to 23 per cent. The move freed more than 600 billion rupees (Dh39.81 billion) for lending, he said on July 31.
Subbarao raised the RBI’s inflation forecast for the year ending March 2013 to 7 per cent from 6.5 per cent and lowered the central bank’s economic growth forecast to 6.5 per cent from 7.3 per cent. The revised estimate matched the previous year’s pace of expansion, which was the slowest in nine years.
The average credit-default swaps on the four Indian lenders touched 337 basis points on August 9, the lowest level since March 20, according to CMA, owned by McGraw-Hill Cos. It was at 344 basis points yesterday, compared with about 265 basis points a year earlier. Similar costs for global financial institutions were 402 basis points on August 20.
The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to debt agreements. A drop signals improving perceptions of creditworthiness. A basis point equals $1,000 (Dh3,673) annually on a contract protecting $10 million of debt.
Five-year default swaps on State Bank, which some investors consider a proxy for the sovereign, dropped six basis points in the past month, according to CMA data. Bond risk of ICICI, IDBI and Bank of India declined 20 points, 7 points and 18 points, respectively, the data show.
The yield on State Bank’s 4.125 per cent dollar-denominated bonds due in August 2017 has dropped four basis points this month to 4.16 per cent, according to Royal Bank of Scotland Group Plc prices.
The lender’s gross bad-loan ratio, which increased to 4.99 per cent last quarter from 3.52 per cent a year earlier, may decline to 4.75 per cent this quarter, chairman Pratip C. Chaudhuri said on August 10.
Soured loans at Indian lenders may climb to as much as 3.5 per cent of total advances by March 2013, from 2.9 per cent in the previous period, as the economy slows, the RBI said in a June 28 report. The ratio may jump to 4.6 per cent in a “severe-risk scenario,” it said.
“It was imperative to address the credit quality issues of the banking sector, which had been under stress for several months,” N. Seshadri, Bank of India’s executive director in Mumbai, said in an August 17 telephone interview. “The worst is behind us.”
Rajender Mohan Malla, chairman of IDBI, didn’t answer two calls to his mobile phone last week. The Mumbai-based bank plans to sell three-year bonds denominated in Singapore dollars, according to a person familiar with the matter, who asked not to be identified because the details are private.
ICICI didn’t respond to an email seeking comment on the drop in its risk of default. India’s second-largest lender said July 26 first-quarter net income rose 36 per cent to 18.2 billion rupees.
State Bank’s profit surged to 37.5 billion rupees in the three months ended June 30, from 15.8 billion rupees a year earlier, according to an August 10 statement. Rates on some loans were cut on August 2.
Finance Minister Palaniappan Chidambaram on August 18 asked financial institutions to follow State Bank in reducing loan rates to support economic growth. The health of India’s banking industry is good, he said.
The yield on the 8.15 per cent sovereign notes due June 2022 rose one basis point, or 0.01 percentage point, to 8.25 per cent last Tuesday, according to the central bank’s trading system. Ten-year yields touched 8.97 per cent on November 14, the highest level in more than three years, the data show.
The government’s rupee debt returned 6 per cent this year, compared with Indonesia’s 6.3 per cent, the best performance among the 11 Asian markets tracked by HSBC Holdings Plc.
The rupee, which declined 4.5 per cent this year in the second-worst performance in the region, advanced 0.3 per cent to 55.575 a dollar yesterday. Indonesia’s rupiah has slumped 4.9 per cent in 2012.
“Risks to the banking sector from domestic factors will start abating now,” D.R. Dogra, managing director of CARE Ratings Ltd, a Mumbai-based risk assessor that covers 1,200 companies, said in an August 16 telephone interview. “Efforts taken to halt deteriorating conditions through policy measures may soon begin to yield results.”