SBI downgrade increases risk of FII outflow: StanChart Bank
Moodys downgrade of SBI has delivered a blow to the Indian economy and its banking sector. According to Anant Narayan, managing director and regional head of fixed income and currency trading, South Asia at Standard Chartered Bank, this move has come at a time when the Indian equity benchmark Nifty is at a pretty critical level. However, he believes the greater risk will be foreign institutional investor (FII) outflows from India.
While we have seen turmoil in the market, both in FX as well as in equity, we really havent seen too much of hard outflows from the market. If that were to happen, thats pretty bad news for all companies in India which have pretty large FII stake, he said exclusively to CNBC-TV18.
Q: A whole host of banks have taken it on the chin because of the downgrade of Moodys. Does it work that way? Do you see their spreads now increasing?
A: I think the context is pretty bad. This is happening at a time when your overall Nifty is at a pretty critical level. We cant forget the fact that globally all investments are going through a lot of churn. The crisis in Europe is still ongoing to which we dont know what the solution would look like.
I think the risk really is that we really start seeing FII outflows at some stage from India. While we have seen turmoil in the market, both in FX as well as in equity, we really havent seen too much of hard outflows from the market as visible from these numbers. If that was to happen and if globally people were to deleverage and pull back their money into their own jurisdictions, then thats pretty bad news for all companies in India which have pretty large FII stake.
So, I think thats the real risk that we are looking at to be honest, both on the rupee front as well as on the equity front. These are very, very critical levels obviously on the Nifty.
Q: But do you have any screen where you can read out the credit default swaps (CDS) on SBI bonds or the yield on their medium term notes (MTNs)? Is there any indication as to how much more expensive does money for a bank like SBI?
A: To be honest, these hardly trade and we dont really understand how much of the CDS has happened because they all happened offshore. But the screen numbers at least are indicating slightly higher numbers against all banks. I think the biggest evidence of the fact that there are issues is that we havent seen too many bank MTNs go through right now. So obviously its a wait and watch for both the investors as well as banks which is again obviously a matter of concern for all of us.
Q: There is something unacceptable in the fact that you have a lot of European banks, global banks with much poorer capital adequacy ratios, poorer quality of debt on their books, especially sovereign debt. On the other hand, SBI is backed by a government which has excellent reserves, whose credit ratings and ability to repay foreign debt cannot be in doubt, whose debt to GDP would be 80% compared to the 171% that runs in several European countries. Given this, would the market question this rating?
A: I think you make a good point. Firstly the Moodys communiqu today actually talks about the fact that they are upgrading the government support for India, that is that they expect the government to step in quite strongly if required, if there is a capitalization requirement etc. So I think including Moodys everybody accepts the fact that SBI is pretty safe and strong, no questions asked.
I think the second point is its a question of the global mood really amongst all investors. We are having a meltdown in many markets. You have seen whats happened to the MSCI Index today. And we dont know where it stops. I think its that context which makes all of this a little vulnerable to kneejerk moves and given again that there are pretty critical levels on the local stock indices thats the overall emerging fear which is sort of guiding the market at the moment. You are absolutely right, in terms of fundamentals, yes they might have an NPA issue for the time being, they might have a few quarters which dont look good, but nobody really questions SBIs health and strength.
Q: The RBI has been consistently hiking rates and there are many of the borrowers will have some difficulty servicing their debt. Does that aggravate the asset quality issues and could that send an indirect signal to the central banker that the banks here are definitely facing asset quality issues?
A: There are a lot of signals for lot of people in whats happening in the market. But you are absolutely right. If you look at the context that Indias facing, high inflation, high interest rates, debt servicing issues, lot of debt coming up for rollover, convertible bonds coming up for rollover, global issues and the fact is that we still havent seen significant outflows from the Indian market. So the overall context is pretty negative which justifies a lot of low beta portfolio holding at the moment.
To that extent, I wish we had answers on which there was consensus; unfortunately we dont. So we will have to sort of muddle our way through and hope that this crisis doesnt elongate from here.
Q: We have seen equity investors leg it out even from banking names like HDFC Bank and ICICI. They dont have a problem of 51% minimum shareholder holding of anybody and their non-performing loans are much smaller. So what would you attribute this to? Is there anything in their MTNs also that shows a rising yield or is this just kneejerk?
A: Its short-term fear. Like I said, if the global issues and the fact that we have specific issues in India leads to investments going out of India, then unfortunately every company, not just banks, every company which has significant FII holdings will be vulnerable to short-term moves. We have seen that in past in 2008. So that fear will always remain. Until we have clarity on how deep a correction can come through in equity markets and what the follow through action from the FII is, that nervousness will definitely remain.
The only silver lining if you ask me is that hopefully a lot of the negativity has been priced in, hopefully a lot of people are sitting on cash and on low-beta portfolios, which means the correction will not be too deep.
Q: Between the private and the public sector banks, the pain is already showing up in the public sector. The loan loss provisioning has risen by 60% year-on-year. Is it yet to come for the private banks or would you say that pressures are likely to be higher in the case of public sector? Will private banks be relatively unscathed?
A: In the current context that India faces and the points that we sort of noted out earlier, frankly everybody is vulnerable. It starts from the corporate sector and therefore impacts the entire banking sector as well.
Hopefully we have enough safeguards and enough capital. If you look at the other banks, the tier 1 ratios are looking pretty healthy. So hopefully we have enough of room and buffer. But again, the market will nervously wait for this to pan out.
Q: There are a bunch of Indian companies wanting to raise money at least to rollover their FCCBs. Would even a mar-key Indian company now find money a little bit more expensive? Is it that all loans are benchmarked off SBI, not just banking loans?
A: If you are looking at the immediate short-term, I can tell you that overnight the global CDS markets had a lot of activity. Large investments banks and banks saw their CDS sell off quite a bit. So, yes in the short run it does look like until we have some clarity on the European situation and what extent people are going to rebalance their portfolios, there will be issues in terms of large term financing.
2012 is when a lot of the debt comes up for redemption and rollover, and hopefully by that time we will have some stability in the markets again.
