India offers dollar bond, testing investors' faith in bank clean-up

NEW DELHI • India is testing global investors' faith in its steps to clean up bad debt, with the first bank offering of a dollar bond that counts towards new rules on capital.

The State Bank of India (SBI) will start investor meetings from Monday to market the nation's first sale of dollar additional Tier 1 securities since the country introduced Basel III rules, a person with knowledge of the matter said yesterday.

Such capital is a lender's first line of defence against financial shocks after equity, as their value can be written down and interest payments deferred.

DBS Group Holdings sold a US$750 million (S$1.01 billion) AT1 note late last month that yielded 3.58 per cent yesterday.

Western Asset Management said Indian banks' asset quality and capital levels remain at the "forefront" of investors' minds, while NN Investment Partners said that buyers "need to be compensated for the higher risk" on this type of securities.

The proportion of stressed assets in the nation's financial system surged to a 16-year high of 11.5 per cent as of March 31, straining risk buffers at lenders given a March 2017 deadline by regulators to provision for a clean-up.

"The Reserve Bank of India's stance in forcing a bad debt recognition and clean-up is a long-term positive for the banking sector," said Western Asset Management portfolio manager Lim Swee Ching. "However, this has resulted in many state-owned banks reporting losses due to heightened provision costs and being even more reliant on capital injections from the government."

A spokesman for SBI said last Tuesday that he could not comment immediately.

The Mumbai-based lender's senior unsecured 2024 dollar notes yielded about 3 per cent yesterday.

S&P Global Ratings said on Thursday that SBI's AT1 notes are rated B+, four notches below the lender's BBB- rating, reflecting the bank's ability to cancel interest and write down the notes.

Fitch Ratings analyst Saswata Guha said an issuance from SBI will help open up the market, set a price benchmark and widen the investor base for other top 10 issuers to tap.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on September 10, 2016, with the headline 'India offers dollar bond, testing investors' faith in bank clean-up'. Print Edition | Subscribe