High Indian yields favour loans
Bonds Cheaper loans seen cooling bond growth after RBI stokes sell-offBY KRISHNA MERCHANTA spike in corporate bond yields
is forcing lower-rated Indian
companies to explore loans as
the gap between bank rates
and bond markets narrows,
especially for shorter-dated
borrowings.
The onshore yields on India’s
AAA corporate bonds for one-
year and three-year tenors have
climbed to 7.38% and 7.66%,
respectively, and are hovering
at 16-month highs, according to
Thomson Reuters data.
Meanwhile, the Marginal
Cost of Funds Based Lending
(MCLR) for State Bank of India,
the largest public sector bank
by assets, has eased to 8.1% and
7.95% for one and three years.“As bond yields climb, the
spread between bond yields and
bank MCLR has compressed
from 150bp almost a year ago
to 30bp-40bp for the one-year
tenor,” said Karthik Srinivasan,
group head for financial sector
ratings at Icra Ratings.
As spreads narrow, “there
will be a natural inclination for
corporates to go to the banks,”
said Radhika Rao, economist at
DBS Bank.
Bond placements are expected
to slow from the double-digit
growth seen in the past few
years. Institutional offerings –
dubbed private placements in
India – touched an all-time high
of Rs6.9trn in 2017, according to
Prime Database.
“Expect bond privateplacements to grow in high
single digits because of higher
yields in the bond market,”
said Sandeep Bagla, associate
director at Trust Capital.
“Issuers are moving to loans in
certain segments and to foreign
borrowings.”
At the shorter end of the
yield curve, banks have already
started competing with the
bond market.
“Banks have started using an
external benchmark, spread
over the Treasury bill rate, or
spread over average certificate
of deposit rates, and are enticing
corporates to avail bank loans,”
said Icra’s Srinivasan.
Banks are now more
confident to lend following
the government’s planto recapitalise the sector
announced at the end of last
year. Consequently, credit
growth has already started
picking up, and rose to a 15-
month high of 10.7% year
on year for the week ending
December 22.SELL-OFF ESCALATES
India’s 10-year government
security maturing in May 2027
climbed to 7.56%, the highest
yield in 19 months, after the
Reserve Bank of India urged
banks to manage their own
risks from their large exposures
to government bonds.
RBI’s deputy governor Viral
Acharya dampened hopes of any
measures from the central bank
to cool the sell-off.
“Recourse to such asymmetric
options – heads I win, tails
the regulator dispenses – is
akin to the use of steroids,”
said Acharya during an annualBaroda to reopen Indian AT
Bonds Offshore issue could be first of many in recapitalisation pushBY KRISHNA MERCHANT,
DANIEL STANTONBANK OF BARODA plans to reopen
the offshore market for Indian
bank capital with an offering
of US dollar Additional Tier 1
securities as early as this month.
A successful issue will be only
the second offshore AT1 from
India and promises to lead to
a flood of similar fundraisings
from the country’s biggest
banks, as they try to restore
capital levels after addressing
bad loans.
Bank of Baroda, India’s third
largest public sector bank in
terms of market capitalisation,
reported gross bad loans at
Rs463bn (US$7.25bn) as of the
end of September, or 11.16%
of total advances. Its net profit
dropped 36% year on year to
Rs3.55bn in the September
quarter.
“We are planning to raise
US$500m from AT1 capital with
a greenshoe option of US$250m,”
Ramesh Gopalaratnam, chieffinancial officer of Bank of
Baroda, told IFR. “We want to
come to the market as early as
possible, before February.” Timing
is subject to regulatory approval.
India’s state banks are taking
advantage of improved access
to the capital markets after
the government announced a
US$32bn recapitalisation plan
for the sector, with US$21bn
of that to come from issuingbonds specifically earmarked
for recapitalisation. The first
recapitalisation bonds are due to
be issued by the end of March,
but no details have been given
yet.
Gopalaratnam said Baroda also
wanted to raise up to Rs60bn
from a qualified institutional
placement of shares in late
February or early March.
“Our capital adequacy ratiowill improve to 12.27% by March
end from 11.64% at the end of
September after the fundraising,”
he said.
Gopalaratnam said Bank of
Baroda would not know how
much capital it would receive
from the government until the
national budget announcement
on February 1. Moody’s said it
expected the government to
allocate the capital across the
21 public-sector banks to ensure
that they all had CET1 ratios
above the minimum Basel III
requirement of 8% by the end of
March 2019.
Bank of Baroda’s CET1 ratio
stood at 8.39% at the end of
September, trailing the current
average of 8.7% for public sector
banks.
Indian AT1s are subject to
temporary writedowns if an
issuer’s common equity Tier 1
capital ratio drops below 5.5%, a
ratio that will rise to 6.125% from
March 31 2019, and coupons are
deferrable and non-cumulative.
Investors, however, have escapedNews
BACK IN FAVOUR
INDIA’S ONLY US$ AT1S HAVE RALLIED SINCE A SHAKY STARTSource: Thomson Reuters Eikon3.4.4.5.5.6.6.Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17
SBI 5.5% AT1 Yield at reoffer