State Bank of India (SBI), the country's largest lender, plans to buy loans from banks in the US and Europe to boost its credit assets abroad and profitability.
The lender, based in Mumbai, is seeking to purchase loans given mostly to Indian companies, Hemant Contractor, who heads the bank's international operations, said in an interview yesterday.
Record net interest margin for its international loans encouraged the 205-year-old lender to seek the acquisitions and expand the business, Contractor said. Credit at State Bank's overseas offices expanded 21 per cent last year, compared with a 17 per cent increase at its local unit, the bank said on February 13.
"Being a state-run lender they have better access to dollar funding which gives them confidence that they will be able to widen the margins further,"said Saikiran Pulavarthi, Mumbai-based banking analyst at Espirito Santo Securities. European banks are trying to sell euro 2.5 trillion ($3.3 trillion) of assets as they seek to cut balance sheets, PricewaterhouseCoopers LLP said in a report on February 3. While the total amount of their bad loans has remained stable at about euro 518 billion in the past year, increases in Spain, Greece and Italy are offsetting reductions in Germany and Ireland, PwC said. "Shedding of assets by European and some American lenders in the aftermath of the crisis gives us an opportunity to buy them selectively," Contractor said. State Bank had 174 branches overseas as of December 31, accounting for more than 16 per cent of its Rs 8.7 lakh crore ($169 billion) loan book, the lender said.
Net interest margin on international loans will widen from a record 1.77 per cent as the cost of dollar funding narrows, Contractor said.
Prime Minister Manmohan Singh's government, the biggest shareholder in State Bank, plans to invest Rs 7,900 crore in the lender to boost its risk buffers. Shareholders of the bank approved the sale of preference stock to the government last month, ending a two-year wait for the funds.
The cost of protecting the debt of State Bank of India against default fell 49 basis points this year to 346, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay face value if a company defaults on its repayment obligations.
The lender will sell medium-term notes to raise up to $1 billion after May, Contractor said.
The bank is also looking to "selectively" finance repayment of Indian foreign-currency convertible bonds that are coming up this year, Contractor said. Indian companies will have to repay $5.3 billion of convertible bonds in 2012, according to data compiled by Bloomberg.
