Default swaps improve faster for SBI than BRICs
New Delhi 19-Nov-2010
The risk of default by the State Bank of India (SBI) is falling more than similar BRIC nation benchmarks as the company, a proxy for the government in the global bond market, sells debt in Europe for the first time in five years.
Credit-default swaps on SBI, the nation’s largest lender, dropped 32 basis points (bps) over the past six months, data compiled by Bloomberg show. That outpaced the 27 bps decline for the Bank of China, the largest in China, and compares with a 14 bps increase for Sberbank, Russia’s largest. Bond risk for sovereign debt in Brazil, whose banks have no similar swaps, fell 23 bps.
Stronger-than-forecast earnings in India are bolstering investor appetite for ¤SBI’s 500 million ($680 million) bond sale, even as concerns that Ireland’s banking industry needs a further bailout pushes up global yields, according to UBS AG.
Net income of 17 of the 30 companies on the Sensex exceeded analyst estimates in the quarter ended September 30, rising an average eight per cent from an year earlier, data compiled by Bloomberg show.
“Improved corporate earnings in the September quarter, which met analysts’ expectations, instill confidence in investors to buy Indian debt,” Ajay Mahajan, managing director at UBS in Mumbai, said in an interview on November 16. “The risk of a loan delinquency blow-out in India is very low.”
Improved earnings
The Reserve Bank of India had said in a report on November 8 the non-performing assets of the nation’s banks, after deducting bad-loan provisions, were 1.1 per cent of the total, as of March 31. SBI has reduced debt due this year to about Rs 2,000 crore ($440 million), from Rs 6,000 crore on March 31. It increased borrowings maturing in 2015 to Rs 11,000 crore, from Rs 6,000 crore, according to data compiled by Bloomberg.
In the three months to June 30, the total profit for the Sensex companies rebounded last quarter, after declining 1.8 per cent from an year earlier. ICICI Bank, India’s second-biggest lender, said last month the second-quarter profit climbed 19 per cent, as loans rose for the first time in two years.
On November 13, the state-run IndianOil had said the net income rose more than 18-fold. SBI’s earnings were little changed from an year earlier, at Rs 2,500 crore, largely due to stricter central bank provisioning rules.
“We should see an 18-20 per cent earnings growth in the Sensex companies for the year ending March,” said Ravi Gopalakrishnan, chief investment officer for equities at Pramerica Asset Managers. The firm is the local unit of Prudential International Investments Advisers, which manages $750 billion in assets globally.
European crisis
SBI’s credit-default swaps jumped 13 bps last week, the largest advance since May 21, as concerns intensified the debt crisis in Ireland and Greece was worsening. The contracts climbed four bps, or 0.04 percentage point, this week to 169 bps yesterday. That level compares with 129 bps for the Bank of China, 197 bps for Sberbank and 110 bps for Brazil’s government.
Credit-default swaps pay the buyer face value in exchange of underlying securities, or the cash equivalent should a borrower fail to adhere to his debt agreements. A basis point equals $1,000 a year on a contract protecting $10 million of debt for five years.
“We’re now in a situation where some Indian banks are offering some value relative to other banks in the region,” said Philippe Petit, senior investment manager in Singapore at Pictet Asset Management, on November 16. SBI “is considered quasi sovereign” and its default-swap price is likely to be “rangebound” depending on global risk appetite, said Petit, whose firm oversees more than $17 billion of emerging-market debt.
Rupee, yields
SBI plans to start its euro debt sale next week, Deputy Managing Director Pratip Chaudhuri had said on November 15. The lender sold $1 billion of bonds in July. The yield on the 4.5 per cent notes, which mature in 2015, has fallen to under 225 bps of government debt rates, as against 277 bps on July 23, Bloomberg data show.
