Indian lenders sold the most bonds in almost four years last month to meet tighter capital rules, and the nation’s leading underwriter says demand will stay strong as the central bank cuts interest rates.
Banks sold at least 124.4 billion rupees ($2.3 billion) of debt, according to data compiled by Bloomberg, the most since March 2009, taking advantage of a slump in borrowing costs for top-rated issuers to a two-year low. The yield on 10-year notes issued by Aaa banks fell 51 basis points last year to 8.91 per cent. The similar rate in China was 5.28 per cent.
Offerings accelerated before a December 31 Reserve Bank of India deadline for adopting Basel III regulatory standards that was later deferred to April 1. Governor Duvvuri Subbarao will cut the 8 per cent repurchase rate, the highest among major Asian economies, by 25 basis points when he next reviews policy on January 29, eight of 10 analysts in a Bloomberg survey predict. Two forecast a 50 point reduction.
“There was a lot of appetite for bank bonds, particularly from long-term investors such as pension funds,” Shashi Kant Rathi, Mumbai-based head of debt capital markets at Axis Bank Ltd, the top rupee-debt underwriter in 2012 with an 18 per cent market share, said in a January 4 interview. “Yields were considered attractive as rate cuts are expected in the near future.”
Capital requirements
India is among 11 of the 27 member countries of the Basel Committee of Banking Supervision that have finalised regulations to meet the latest global accord on capital requirements, according to a December 28 RBI statement. The monetary authority didn’t say why it deferred the deadline by three months.
Implementation of the rules, which more than triple the amount of core capital lenders must hold compared with earlier international standards, “is an absolutely critical step towards strengthening the resilience of the global banking system,” the Basel group said in a December 14 statement.
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“Those who missed the bus in December may tap the market before the April 1 target date,” Rathi said. Axis Bank, the nation’s third-biggest private lender by market value, last month sold 25 billion rupees of notes due in December 2022 at a coupon of 9.15 per cent, he said.
ICICI Bank Ltd, India’s second-largest lender, sold 38 billion rupees of 10-year bonds in December at 9.15 per cent, while state-owned Bank of Maharashtra issued 10 billion rupees of similar securities at 9 per cent, according to data compiled by Bloomberg.
Growth push
The surge in bond sales by lenders comes at a time when the government and the central bank are stepping up efforts to revive Asia’s third largest economy.
Since mid-September, Prime Minister Manmohan Singh has reduced taxes on companies’ overseas debt, cut energy subsidies to improve public finances and allowed more foreign holdings in local-currency bonds and industries including retailing and aviation. Singh said December 27 he is seeking 8 per cent average annual economic expansion in the five years to March 2017. Growth averaged 7.9 per cent in the five years ended March 2012.
The government on December 17 lowered its estimate for economic growth in the financial year through March to as little as 5.7 per cent, the least in a decade, from an earlier estimate of as much as 7.85 per cent. Inflation eased to a 10-month low of 7.24 per cent in November, official data show.
Monetary easing
Subbarao said December 18 the RBI’s focus is shifting toward aiding growth. He last reduced the benchmark rate by 50 basis points in April and resisted the government’s calls to cut it further as the central bank sought to curb the worst inflation among the largest emerging markets.
To boost lending and ease financing costs for companies, Subbarao lowered the proportion of deposits local banks must set aside as reserves to a 36-year low of 4.25 per cent. The RBI injected more than 2.7 trillion rupees into the banking system in 2012 by lowering the so-called cash reserve ratio by 175 basis points and buying debt at open-market auctions.
Credit Suisse AG and Goldman Sachs Group Inc. predict a 50 basis point, or 0.50 percentage point, decrease in the repurchase rate on January 29, while BNP Paribas SA expects a 25 basis point reduction.
Interest-rate swaps in India are extending a drop, after declining in the previous three quarters, signaling investors boosted rate-cut bets. The price of derivative contracts that fix rates for a year fell two basis points yesterday to 7.58 per cent, taking the drop since March to 42 basis points, data compiled by Bloomberg show.
General buoyancy
The yield on benchmark 10-year government bonds has dropped 24 basis points since the last monetary policy review on December 18 to a two-year low of 7.90 per cent. The rate on the benchmark 8.15 per cent debt due June 2022 rose one basis point to 7.91 per cent yesterday, offering an extra 601 basis points over US Treasuries. The rupee strengthened 0.4 per cent to 55.0050 per dollar.
“There are more banks waiting to raise capital and will probably do so this quarter,” Ajay Manglunia, senior vice president and head of fixed-income at Edelweiss Capital Ltd said in a January 4 interview. “There is a general buoyancy in the rate environment and you typically see a lot of interest from retirement funds and provident funds for long-maturity notes.”
Still, SBI Funds Management Pvt prefers to buy government bonds because they are more actively-traded than those issued by companies or lenders, according to Rajeev Radhakrishnan, the head of fixed-income at the mutual fund that manages the equivalent of $9.4 billion in Indian assets.
Government securities
“We have been overweight on government securities,” Radhakrishnan said in a January 4 interview. “If people are expecting rates to come down, they will lock-in investments in long-term bonds.”
Bond risk for Indian banks extended a decline this month, after falling 167 basis points in 2012. The average cost of insuring the debt of five lenders against non-payment using credit-default swaps slid 37 basis points in January to 217 yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Ten-year Aaa notes issued by banks offer an extra yield of 99 basis points over similar-maturity government bonds, data compiled by Bloomberg show. The spread has widened 31 basis points since touching a seven-year low of 58 basis points in November.
“Yields on bonds issued by banks compare favorably with government bonds, and that probably helped as they rushed to increase capital to meet Basel III norms,” N Srinivasan Venkatesh, Mumbai-based head of treasury at state-run IDBI Bank Ltd, said in a January 4 interview. “Given the benign interest- rate environment, there will be good appetite.”