BackIndian banks outperform in Asia as bond supply dwindles
Dollar debt from lenders in the country has given investors an average return of 2.6% this year, outperforming peers in the region
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The law of supply and demand is working in favour of Indian bank bond investors.
Dollar debt from lenders in Asia’s third-largest economy has given investors an average return of 2.6% this year, outperforming peers in the region. Indian banks sold $2.6 billion of dollar notes in 2015, the least since 2009, according to Bloomberg compiled data.
Loans in India grew 9.5% in the 12 months ended 21 August, slightly above a 21-year low hit at the end of June, as banks seek to shield profits amid surging delinquencies. The slowdown in lending has pushed the credit-to-deposits ratio to the lowest in two years, meaning financial institutions have less need to raise funds by selling bonds.
“The weak loan growth that the banks are experiencing is placing less pressure on funding," said Swee Ching Lim, a Singapore-based credit research analyst at Western Asset Management Co., which managed $452.5 billion as of 30 June. “That’s one of the driving factors behind the much slower pace of Indian bank dollar issuances," and their outperformance, he said.
As banks drag their feet on passing on benchmark interest rate cuts, Indian companies are favouring bonds over loans. Corporates issued a record ₹ 96,970 crore of local-currency notes this year, Bloomberg compiled data show. The average yield on such securities with top ratings due in three years has dropped 28 basis points in the period to 8.38% as the Reserve Bank of India (RBI) cut its repurchase rate.
“There hasn’t been a lot of supply of bank bonds which reflects limited demand from Indian corporates for dollar loans," said Thomas Drissner, a Singapore-based investment manager at Aberdeen Asset Management Plc, which managed $483.8 billion as of 30 June.
As a result, banks themselves have sought less money from bond markets even at home. Lenders have sold ₹ 33,970 crore in rupee notes 30 June, about 61% of the average quarterly issuance for the sector since 2010, Bloomberg data show.
The resulting scarcity has buoyed the securities. The price of the 2020 dollar bonds of ICICI Bank Ltd, the country’s largest private bank, rose 0.4% this year. That compares to a 0.8% drop for the 2018 notes of China Minsheng Banking Corp., China’s biggest private lender, since they were sold in May. It also contrasts with a 1.4% fall for the 2020 notes of Korea’s largest listed lender Shinhan Financial Group Co. since issuance in April.
Industry challenges
Not all lenders in India look equally appealing to investors as the banking industry grapples with the highest level of troubled loans since 2002. Stressed assets hit 11.1% of total advances at the end of March, according to the latest semi-annual statistics the RBI published on 20 June. In August, the government announced it would inject ₹ 20,000 crore of capital into 13 state-owned banks, whose shortage of funds also capped their lending ability.
“Public banks will have to continue deleveraging while private banks can generate sufficient internal capital to fund future growth," Aberdeen’s Drissner said. “We identify strong players and we’re happy to lend to those."
Credit demand has cooled as Prime Minister Narendra Modi struggled to pass economic proposals through parliament and was thwarted in efforts to make it easier for companies to acquire land. Economic growth slowed to 7% in the three months ended June, down from 7.5% the previous quarter. At the same time, higher tax revenue for the government has spurred optimism it will meet the goal of cutting the budget deficit to an eight-year low in the year ending March 2016.
“The supply picture for Indian banks has been a tailwind for their bond performance thus far in 2015," Western’s Lim said. Bloomberg
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