Credit Default Risk Falls at State Bank of India on Deposits

Updated on
  • SBI’s credit default swaps fell to lowest since April 2010
  • Deposits, capital-raising plans boosted sentiment: Fitch

The cost of insuring the bonds of State Bank of India dropped to the lowest in almost six years as deposits at the country’s largest lender surged after Prime Minister Narendra Modi forced residents to cash in large-currency notes in a bid to curb corruption.

Credit-default swaps protecting the bank’s debt against non-payment for five years declined to 142.34 basis points on Friday, the lowest since April 2010, according to prices from data provider CMA. The contracts, considered a proxy for the sovereign, dropped 8 basis points last week.

“It’s a reflection of how people perceive the financial stability of a bank,” said Saswata Guha, a Mumbai-based director for financial institutions at Fitch Ratings Ltd. “In SBI’s case, the driving factors are perhaps the huge influx of deposits post-demonetization, the likely improvement in capitalization from infusion of funds by the government, and plans to raise extra capital this year.’’

After Modi rolled out the demonetization plan in November, the State Bank of India saw its net deposits climb by 1.4 trillion rupees ($20.6 billion) as of Jan. 2. That added to the 18.6 trillion rupees it had in September. The lender is benefiting from Modi’s plan to replace about 86 percent of the currency, which has led to citizens rushing to banks to deposit their bills.

“We do expect a part of the inflows will stay with the bank, and will lead to an improvement in its overall funding base and add to its low-cost deposit franchise,” said Alka Anbarasu, an analyst with Moody’s Investors Service in Singapore.

Shares of State Bank of India rose 1 percent to 258.65 rupees in Mumbai on Wednesday, taking their 2017 gains to 3.3 percent. The nation’s benchmark S&P BSE Sensex index gained 0.7 percent.

The finance ministry in July 2016 said it would inject 75.8 billion rupees into the State Bank of India to boost credit growth. The lender also has plans to raise 150 billion rupees by selling shares.

To read more about Modi’s move to ban high-value bank notes, click here

While the currency-swap plan is seen improving State Bank’s overall funding base, Moody’s said its profit will remain under pressure due to sluggish credit growth. Lending by Indian banks rose 5.15 percent as of Dec. 23, the slowest pace since 1992, RBI data show.

“Despite the pressure on its profits, we expect the bank will maintain its capitalization levels,” Anbarasu said. “From a credit perspective, we see stabilization in SBI’s profile, particularly in relation to the asset quality deterioration that the bank witnessed over the past four to five years.”

State Bank’s loan growth is expected to expand as much as 9 percent in the year to March 31, compared with 6.7 percent as of Dec. 31, after a reduction in interest rates, according to its chairman, Arundhati Bhattacharya.