SBI Downgrade
and RBI Interest Rate Policy
Rama Krishna Vadlamudi,
|
||
The Moody’s downgrade of
State Bank of India has huge
consequences for banking sector in India . The downgrade has brought to
focus the issues that are bedeviling the sector. Let us hope that the
Government will take some action to address the issues head on and without any
further delay. Reserve Bank of India
is known to be a good caretaker of banks. Now that SBI is downgraded, can we
expect RBI to change its hawkish stance on interest rates with a view to bringing
relief to banks?
Moody's Investors Service
has downgraded the State Bank of India 's (SBI) bank financial
strength rating (BFSR), to D+ from C-. This has resulted in the downgrade of
the Hybrid debt rating to Ba3 (hyb) from Ba2 (hyb).
The rating agency cited the delay in capital infusion by the
Government and deteriorating asset quality as reasons for the debt downgrade.
SBI’s Tier I capital has come down to 7.6 per cent as on 30 June 2011. SBI’s
NPAs are at Rs 27,768 Crore or 3.52 per cent of loans as on 30 June 2011.
SBI’ five-year credit default swap went up by 90 per cent since
August 2011 from 189 basis points to 363 basis points now as per Bloomberg. The
current CDS premium of 363 basis points (or 3.63 per cent) indicates that for
every 100-dollar worth of investment in SBI paper, investors have to pay
premium of 3.63 dollars to protect themselves from default. Many banks witnessed
jump in their CDS premiums of late due to concerns of sovereign debt crisis.
If you want to know more about CDS, just click:
The Government of India has been dithering on capital infusion for
almost a year – unable to decide on its subscription as a 60-per cent
shareholder to SBI’s proposed rights issue. The slow decision-making has cost
the bank a great deal of reputation.
What the downgrade clearly points to is that the cost of raising
money will increase for SBI on the international markets.
The Central Government is facing many problems on the fiscal front
and its Rs 40,000-crore disinvestment programme is in a limbo. Against this
background, one needs to be circumspect about the ability of the Government to
part with funds.
There is no doubt that the Moody’s downgrade has come as a bolt
from the blue for SBI as well as for the Government. Ironically, the bad news
has emerged when a string of banks in the eurozone and the US have been
downgraded.
One cannot compare Indian banks with the much bruised and battered
European or US banks who are in deep trouble. As a ‘Banker to Every Indian,’
SBI has its own strengths. However, the Moody’s downgrade of SBI has dented the
confidence and trust investors, if not other stakeholders, have reposed in SBI
for long.
We know actions have consequences. Sometimes, the consequences are
unintended. Evidence suggests that whenever banks face some difficulties,
Reserve Bank of India
comes to their rescue in one form or another. Now that SBI is downgraded and is
feeling the pressure of deteriorating asset quality, is it unreasonable to
think that RBI will shed its dear money policy and indicate that it is going to
start cutting interest rates sooner than later?
Overall, investors will be better off not touching the SBI equity
shares for the time being, even at
the current market price of Rs 1,750 per share, unless one
can see firm commitment from the Government to pump money into SBI.
Sentiment wise also, it is difficult to buy a stock when the
erstwhile blue chip has come down by 50 per cent from its yearly peak of Rs 3,500. To put it differently, the
stock has lost Rs 1.10 lakh crore of its market capitalization in the past
eleven months.
This 50-per cent fall is way above the fall of 32 per cent in Bank
Nifty index and 36 per cent fall of archrival ICICI Bank’s scrip. It would not
be a surprise if ICICI Bank would surpass SBI’s market capitalization in the
next one year as the gap between the two behemoths is narrowed down to just 14
per cent.
Disclaimer: The author’s
views are personal. He has a vested interest in the stock markets and his views
should be taken with a pinch of salt. He may change his views very fast without
any notice depending on the market and economic conditions. His views should
not be construed as investment recommendation. There is a risk of loss in
equity investments. Investors need to consult their certified financial adviser
before making any investment decisions.
For author’s articles on
financial markets, just click:
No comments:
Post a Comment