Default Swaps Show State Bank Beating China, Russia Rivals: India Credit

The cost of protecting State Bank of India’s debt from default fell for 11 straight days, the longest stretch of declines since at least 2004, as lenders’ willingness to extend loans underscores an improving economy.

Credit-default swaps on Mumbai-based State Bank dropped 55 basis points, or 0.55 percentage point, in the past six months to 155 on Dec. 16, CMA data show. Bank of China Ltd. contracts fell 24 basis points to 118 while those for OAO Sberbank, Russia’s largest lender, declined 11 to 188.

The perceived creditworthiness of India’s biggest bank improved faster than for lenders in the other largest emerging markets as companies step up borrowing for construction projects. Prime Minister Manmohan Singh is targeting 9 percent growth for at least the next three decades and plans to spend about $1 trillion on roads, ports and public infrastructure.

“India’s Reserve Bank has been prompt in raising rates to head off inflation, the economy is strong, non-performing loan ratios are under control and bank credit-default swaps are reflecting that,” Vijay Chander, Hong Kong-based head of credit strategy at Standard Chartered Plc, said in an interview.

International bond sales in India climbed to $11.2 billion this year from $2.4 billion in 2009, with bank debt accounting for 60 percent, according to data compiled by Bloomberg. New bond sales from Indian banks could reach as much as $7 billion next year, according to Nomura Holdings Inc. As India seeks funds for key infrastructure projects “foreign capital may prove even more useful,” International Monetary Fund Managing Director Dominique Strauss-Kahn said in a Dec. 2 speech.

Infrastructure Demand

“There’s greater demand for infrastructure lending,” Nondas Nicolaides, senior banking analyst with Moody’s Investors Service, said in a phone interview from Limassol, Cyprus. “India is an economy with such great growth potential that I don’t see a problem for even the smaller banks selling dollar bonds.”

The outlook for India’s banking system is conducive to high credit growth as economic expansion returns to pre-crisis levels and deposits increase, Moody’s said in a report Dec. 16.

The yield on Bank of India’s $500 million of 4.75 percent notes due in September 2015 fell 41 basis points to 235 more than Treasuries since Dec. 1, BNP Paribas SA prices show. The decline compares with a 55 basis point drop for Bank of Moscow OJSC’s $750 million of 6.699 percent notes due in March 2015. The yield on Banco Santander Brasil SA’s $500 million of 4.5 percent bonds, due April 2015, fell 46 basis points to 266 over the same period.

‘Not Much Downside’

Indian banks that “underperformed” in the recent Asian corporate bond rally now look good value, according to Royal Bank of Scotland Group Plc research.

“For credit investors I don’t see much downside,” Kristine Li, Asia-Pacific credit strategist at Royal Bank of Scotland said in an interview from Singapore. “Indian banks have better fundamentals in terms of asset quality and earnings stability, and the tighter spreads versus Russia and Brazil are well justified.”

Indian dollar bonds returned 9.4 percent this year. The extra yield investors demand to hold the notes rather than U.S. Treasuries fell six basis points last week and dropped 80 basis points to 334 this half, according to HSBC Holdings Plc’s Asia Dollar Bond Index for India, in which banks have a 71 percent weighting. That compares with a 99 basis-point decrease for dollar bonds of Asian banks, JPMorgan Chase & Co.’s Financials Blended Spread index show.

A rise in dollar funding costs meant some Indian banks postponed sales. Union Bank of India may delay a planned sale of notes on rising London interbank rates, Chairman M.V. Nair said in New Delhi last week.

‘Aggressive on Pricing’

“Indian banks tend to be market opportunistic and relatively aggressive on new issue pricing,” Li said, citing domestic liquidity as another risk. With “more money flowing into emerging markets, spreads compressing across Asian banks and Indian banks showing strong earnings results, their credit ought to catch up with the rest of Asian banks,” Li said.

BES Investimento do Brasil SA’s $500 million of 5.625 percent notes due March 2015, rated the second-lowest Baa2 investment-grade by Moody’s, are trading at a yield of 506 basis points more than Treasuries, according to Trace. Similar-rated 4.75 percent bonds due October 2015 from Vadodara, Gujarat-based Bank of Baroda trade at a spread of 272 basis points, BNP Paribas prices show.

Regulators seeking to rein in the sort of risks that caused the financial crisis reached a compromise in Switzerland in September that more than doubles capital requirements for the world’s banks while giving them as long as eight years to comply.

Rupee Falls

The Basel Committee on Banking Supervision wants banks to hold enough assets that can be converted into cash to meet their needs in a “severe liquidity stress scenario,” according to a document. While India’s central bank hasn’t said whether it will adopt the so-called Basel III accord, banks are “well positioned to make the transition to a stricter capital regime,” Moody’s said in its report.

Contracts protecting debt of ICICI Bank Ltd., India’s second-largest lender, fell 21 basis points this month to 193 basis points, after reaching a two-month low of 191.5 last week, CMA prices show. The bank’s default swaps have dropped 62 basis points since July 1.

The rupee fell last week after two weeks of gains. The rupee lost 0.7 percent during the week to 45.3550 per dollar. Indian markets were closed Dec. 17 for a holiday.

Government bonds rose in the week, driving yields to the lowest level in a month and a half, after the central bank said it would repurchase 480 billion rupees ($10.6 billion) of debt over four weeks to boost cash at banks.

The yield on the 7.80 percent note due May 2020 fell 12 basis points to 7.95 percent, according to the central bank’s trading system. The yield decreased 13 basis points.