Swaps show SBI beats China, Russia rivals

The cost of protecting State Bank of India’s (SBI’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 SBI dropped 55 basis points (bps) or 0.55 percentage point, in the past six months to 155 on December 16, CMA data show. Bank of China contracts fell 24 bps 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 other large emerging markets as companies step up borrowing for construction projects. Prime Minister Manmohan Singh is targeting nine per cent growth for at least the next three decades and plans to spend about $1 trillion on roads, ports and public infrastructure.

“The Reserve Bank of India 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,” said Vijay Chander, Hong Kong-based head of credit strategy at Standard Chartered.

International bond sales in India climbed to $11.2 billion this year, as against $2.4 billion in 2009, with bank debt accounting for 60 per cent, 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. As India seeks funds for key infrastructure projects, “foreign capital may prove even more useful,” International Monetary Fund Managing Director Dominique Strauss-Kahn had said on December 2.

Infrastructure demand
“There’s greater demand for infrastructure lending,” said Nondas Nicolaides, senior banking analyst with Moody’s Investors Service. “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 was conducive to high credit growth as economic expansion returned to pre-crisis levels and deposits increased, Moody’s said in a report on December 16.

The yield on Bank of India’s $500 million of 4.75 per cent notes due in September 2015 fell 41 bps to 235 more than treasuries since December 1, BNP Paribas SA prices show. The decline compares with a 55 bps drop for Bank of Moscow OJSC’s $750 million of 6.6 per cent notes due in March 2015. The yield on Banco Santander Brasil SA’s $500 million of 4.5 per cent bonds, due April 2015, fell 46 bps 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 research.

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