Rapid growth to hit bond spreads

ANALYST'S VIEW

Although banking shares have recovered over the past month along with the equity markets, they have mostly underperformed in their respective local benchmarks.

This is understandable given the various negative headlines from subprime exposure, ABCP issues, and the lack of positive catalysts. Credit spreads were affected by such developments as well, with the five-year Credit Default Swaps (CDS) widening out significantly for most major banks and still remaining considerably wider than the tights recorded earlier this year despite the spread recovery following the Fed rate cut.

The main exception on the equity performance side was in India, where ICICI Bank outperformed the Sensex by 5 per cent. The bank trades at significantly wider spread than other major banks in the region, which is partly due to its lower credit rating of BBB versus the AA or A of counterparts in Singapore, Korea, Taiwan, and Malaysia.

In addition, however, we think ICICI's aggressive expansion strategy and continued debt issuance, both actual and prospective, have contributed to further underperformance on the credit side. We would see this as a case where high growth has positive implications for equity investors while being seen negative by credit investors.

Bloomberg reported that ICICI Bank plans to raise $11 billion in the next 12 months from overseas markets in the form of loans, bonds, shares, and deposits. The bank has already issued a $1.5 billion equivalent syndicated loan facility as well as a $2 billion bond over the past month.

Most recently, the bank launched a $500 million CP facility in the US, which received the highest short-term rating of Prime-1 by Moody's and A-1+ by S&P. The ratings were higher than its standalone ratings as Bank of America is providing support to the facility.

Secondary spreads on the recently issued $2 billion 2012 bond widened by 10-15 basis points over the past couple of days, which indicates market concerns over the potential of additional supply. This is in line with our view that the aggressive growth strategy and subsequent issuance overhang is likely to keep pressure on ICICI Bank as well as other Indian bank bond spreads.