Russian Bank’s Rupee Funding Needs Seen Testing Debt Demand

  • Sberbank rupee program for branch gets top rating on support
  • Parent’s 2023 bond yield reaches all-time low as sales dry up

Russia’s biggest lender may sell the first rupee-denominated debt from the nation ever, in a test of appetite for foreign-currency bonds from the country that are in short supply due to sanctions.

Sberbank PJSC unveiled the program to sell 1 billion rupees ($15 million) of certificates of deposit this month, according to India Ratings & Research Pte, the local unit of Fitch Ratings, which accorded the money-market instrument its highest score of A1+. "In order to support our rupee denominated lending and avoid significant foreign currency exposure we have to match it with local currency funding," spokeswoman Anastasia Vakhlamova said by e-mail on Aug. 10, without confirming any CD program.

Global investors have pushed Sberbank’s 2023 dollar bond yield to record lows as U.S. and European sanctions related to the Ukraine conflict largely squeezed Russian borrowers out of global capital markets in 2014. Outstanding hard-currency debt from the nation’s companies has since tumbled by $31 billion, or 19 percent, according to data compiled by UralSib Capital. Sberbank has had a single branch since obtaining its Indian banking license in May 2010, among 325 outlets run by 46 foreign banks at the end of 2015.

“We will definitely invest in such papers that are being issued by foreign bank branches if the issuer has parent support, a strong loan portfolio and stable leverage ratios,” said Dwijendra Srivastava, the Mumbai-based chief investment officer for debt at Sundaram Asset Management Co. “Why not?”

India Ratings said its assessment reflects the commitment by Sberbank’s Moscow-based parent to extend a dollar-based credit line to the branch in the capital New Delhi if needed, amid concerns over bad loans in the Asian nation.

The rating company warned that the branch’s 20 borrowers exposed it to “significant non-performing loan and credit-cost volatility." Any reduction in Sberbank’s commitment to its unit, such as the inability to roll over the line of credit into 2017, may trigger a negative rating action, said Abhishek Bhattacharya, an analyst in Mumbai at India Ratings.

Gross bad loans in India’s banking industry stood at 7.6 percent in March, while stressed assets reached a 16-year high of 11.5 percent, according to central bank data. Sberbank’s branch in Delhi had a figure of 15.7 percent in fiscal 2015, up from 6 percent a year earlier, according to India Ratings, which noted that its loan book of 3 billion rupees is minuscule relative to the group. Sberbank’s total loans stood at $293.7 billion on March 31, based on its quarterly report.

Vakhlamova said that problem debt in the Indian banking sector “certainly concerns all players.”

"Sberbank India is focusing now on transactional business and we have no plans to significantly expand our lending activities unless there is high demand from high quality Sberbank Group companies," she said.

The governments expect trade between India and Russia to triple over the coming years from the current $9 billion a year, she said. Sberbank aims to service 50 percent of Russia’s exports to India and 10 percent of India’s sales to Russia, Vakhlamova said.

More Stringent

There were 1.76 trillion rupees worth of of certificates of deposit outstanding from Indian commercial banks as of July 8, according to Reserve Bank of India. Some 129 billion rupees of them were issued in the two weeks through July 8, at an average rate of 6.52 percent to 7.57 percent.

Sberbank is probably raising funds locally because borrowing in Russia is expensive and the ruble has been volatile, said Sundaram’s Srivastava. Three-month certificates yield 6.6 percent in India and surged in Russia to as high as 33 percent from about 9 percent after sanctions kicked in August 2014, according to Bloomberg data.

“We are open to investing in such issuance but our yardstick will be more stringent than usually applicable to certificates of deposit issued by Indian banks or other foreign banks which have a larger presence,” said Lakshmi Iyer, chief investment officer for debt at Kotak Mahindra Asset Management Co. in Mumbai. “We will adduce more factors such as global and sector view, parentage support and balance sheets before taking a call.”

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