INSUBCONTINENT EXCLUSIVE:
Mumbai: Optimism on the state of Indian banking may be rising among global investors, as the cost to insure the bonds of the country’s two
top banks has declined.
One-year Credit Default Swap (CDS) contracts on the overseas bonds of State Bank of India and ICICI Bank fell
113-137 basis points in the past nine trading sessions, show data from Bloomberg.
This suggests overseas investors expect banks to only get
financially sounder from here, said analysts.
“Indian banks, especially the large ones, are expecting to write back substantial provisions
if some of the big cases like Essar Steel and a few more get resolved successfully,” said Jindal Haria, the director for banking and
financial institutions at India Ratings
The banking industry expects that these assets are close to resolution under the bankruptcy law
As a result, “there may be either earnings upside or buffers to withstand provisions on some of their exposures to stressed financial
institutions or real estate”, he said.
CDS acts as a shield against the risk of default on outstanding debt securities
The market for CDS is almost non-existent locally, but global investors trade on it
The platform is available only for two Indian banks: SBI and ICICI Bank
ICICI Bank’s one-year CDS was 18.13 on Tuesday, compared with 19.50 on November
21
This means, an overseas investor who bought $100 of ICICI Bank’s dollar-denominated bonds on Tuesday had to pay 18.13 cents more to buy
insurance against the investment
On November 21, that cost was 19.50 cents
If the issuer defaults, the investor’s loss would be covered.
SBI’s CDS was 14.95 on Tuesday, as against 16.08 on November 21.
These two
and HDFC Bank are the three systematically important Indian lenders
These are considered “too big to fail”, and the fall in CDS suggests the improving investor confidence on their fundamentals.
On
November 16, the Supreme Court cleared the air over the Essar Steel case, which involved about $6 billion lender payout from the successful
The case lingered over two years, surpassing the stipulated timeline for resolution under the Insolvency and Bankruptcy Code.
Banks are
expected to recover 90% of their exposure to the Essar Steel account, with State Bank of India getting nearly ?12,000 crore out of its
?13,220 crore outstanding.
“The recovery mechanism is more structured now with IBC, and financial services firms being brought under
IBC,” said Joydeep Sen, a consultant with Phillip Capital India
“Though the credit situation is challenged, we may be at or near the bottom.” “With S-P confirming India's credit rating (at
BBB-minus), there is no major issue about growth slowdown,” he added.
The amendment to the IBC to include non-banking financial
institutions as well under its purview has also likely helped improve the CDS rates
“Inclusion of NBFIs in the country’s bankruptcy code is credit positive for India's banks,” international ratings company Moody’s
had said in a recent note.
