Lehman stays cautious on banking sector

ANALYST'S VIEW

After dealing with the current liquidity crunch, the focus of policy makers will shift to the economic impact, future growth rates and politics.

Currencies are also likely to acquire centre-stage. With the euro strengthening by 3.7 per cent against the US dollar and yen remaining unchanged since the end of August, the policy makers would concentrate on currency management.

Most currencies in the region have appreciated by 2-3 per cent, with the exception of HK dollar and Rmb. The management of currencies should have a meaningful impact on interest rates and inflation.

Besides, issues such as terrorism and bird flu could gain prominence following the recent reports on Al-Qaeda regrouping and bird flu break-out in the Guangdong province.

The first major bond issue since the market sell-off was ICICI Bank's $2 billion 5-year senior bond. At a spread of T+237.5 bp, this bond was quoted at a significant discount to the outstanding 5-year bond which was at about T+200 bp and subsequently tightened.

Such issuance is in line with our view that Indian banks will continue to be major issuers. But the large size is surprising as the bank effectively repriced its curve wider by close to 30 bp.

We maintain our cautious stance on the Indian banking sector because of such issuance overhang and potential liquidity and asset quality issues.