The warning from Moody’s Investors Service that India’s state-owned banks face ratings cuts because of rising bad loans has halted a two-month rally in bond insurance costs.
Credit default-swaps on four lenders rose to an average of 320 basis points on March 6, after falling to an almost four- month low of 287.2 on Feb. 22, according to CMA. Swaps on State Bank of India (SBIN), Export-Import Bank of India, Bank of India and IDBI Bank Ltd. (IDBI) dropped 105 basis points in January and February, the biggest two-month decline since the period ended May 2009, the data show. Contracts on 48 lenders in the Asia-Pacific region fell 70 basis points in the past two months.
The central bank’s record monetary tightening in the last two years has slowed economic growth and strained finances of companies as earnings dropped an average 12 percent in the quarter ended Dec. 31, according to data compiled by Bloomberg. The risk of ratings downgrades has increased after the nation’s top court last month rescinded phone licenses of operators owing $2 billion in debt, Moody’s said in a statement Feb. 27.
“State-run banks have a higher level of bad loans and are in a more difficult position than their private-sector peers,” Vineet Gupta, vice president at Moody’s, said in a telephone interview from Singapore yesterday. “The cancellation of the telephone licenses is the latest in a row of concerns that will increase bad loans and keep the ratings of lenders under pressure.”
Among the banks rated by Moody’s, State Bank, Canara Bank, IDBI and Punjab National Bank are the state-owned lenders with “significant” exposure to the telecommunication-license loans, according to the report.
“The banks most at risk of a downgrade are those that feature insufficient earnings and capital buffers to withstand their combined exposures to troubled borrowers,” according to the report.
India’s Supreme Court on Feb. 2 canceled 122 mobile-phone permits, whose sale in 2008 sparked the nation’s biggest corruption investigation and led to the jailing of a former minister. Judges G.S. Singhvi and A.K. Ganguly scrapped the licenses and ordered operators to pay as much as 50 million rupees ($987,167) as a penalty.
The country’s auditor said in a 2010 report the sale of the airwaves lacked transparency and ineligible bidders bought them at “unbelievably low” prices, depriving the treasury as much as $31 billion.
Bank of India
Moody’s today cut its financial strength rating on Bank of India, the nation’s fourth-largest state-run lender, to D from D+, citing increasing bad loans and low capital ratio.
“Economic slowdown, high interest rates and high inflation” may cause bad loans at the lender to worsen, the credit assessor said in an e-mailed statement. Soured loans at Bank of India increased to 2.7 percent in December from 2.2 percent in March last year.
Credit-default swap contracts on State Bank, the nation’s biggest by assets, advanced 31 basis points over the past two weeks to 312, according to data provider CMA.
Contracts on IDBI Bank increased 35 basis points in the same period to 335, following eight weeks of declines, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
“The comparatively higher level of bad loans at the state- run banks is getting reflected in the bond yields and credit default swap prices,” Brian Hunsaker, a banking analyst at Keefe Bruyette & Woods Asia, said in a telephone interview from Hong Kong yesterday. “It could take at least six months before bad loans can come down.”
State Bank had the highest level of bad loans, at 4.6 percent of total assets, as of December among the public-sector lenders rated by Moody’s, according to the report. It was followed by Central Bank of India (BOI), with 3.7 percent, and then Union Bank of India, with a ratio of 3.3 percent.
State Bank Chairman Pratip Chaudhuri and Chief Financial Officer Diwakar Gupta could not be reached on their mobile phones yesterday for comments.
“Whether or not monetary policy is relaxed, easier availability of funds in the economy is the key for the bad loans to be reduced,” R.K. Bansal, executive director of IDBI Bank, said in a telephone interview from Mumbai yesterday.
The Reserve Bank of India on Jan. 24 left the benchmark repurchase rate at 8.5 percent for a second month, after raising it 13 times since March 2010 to cool inflation. On the same day it lowered the growth forecast to 7 percent in the year through March from the 7.6 percent predicted in October.
Elsewhere in India’s credit markets, the yield on 10-year government bonds was little changed at 8.24 percent today in Mumbai. The rupee weakened to the lowest in six weeks on concern growth is slowing in the region after Chinese Premier Wen Jiabao set an economic growth target of 7.5 percent for 2012, from an 8 percent goal in place since 2005.
The currency declined 0.3 percent today to 50.56, the lowest since Jan. 18, and the worst performance among Asian currencies, according to data compiled by Bloomberg.
Three-month offshore non-deliverable forward contracts traded at 51.56 a dollar today, compared with 51.65 on March 6. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
IDBI Bank’s 10 billion rupees of March 2026 securities declined to 96.33, pushing up the yield to 9.89 percent, the highest since Jan. 2, according to data compiled by Bloomberg. Yields on Bank of Baroda’s notes maturing in July 2014 rose to the most since November, the data show.
The average yield on global bank bonds fell 95 basis points to 3.86 percent this year, according to a Bank of America Merrill Lynch index.
“Bank bond yields are reflecting the difficulties lenders face and the developments in the economy in the past few quarters,” Rajiv Kumar Bakshi, executive director at Bank of Baroda (BOB), said in a telephone interview from Mumbai yesterday. “Respite is unlikely in the short term.” He declined to comment on the Moody’s report.
The credit assessor downgraded the outlook for India’s banking system to “negative,” in November saying a domestic economic slowdown and the surge in borrowing costs will boost bad loans.
Finance Minister Pranab Mukherjee will present the budget on March 16 for the financial year starting April 1. The government is expected to announce policy measures to boost growth and improve the quality of India’s infrastructure, R.K. Gupta, Delhi-based managing director of Taurus Asset Management, which has $1 billion under investment, said in a telephone interview on March 5.
“A further spike in bad loans can occur if no policy reforms are announced in the budget,” said Gupta.