State Bank of India CDS rise on new CDs from 3G auction

CreditLime CDS Watch
May 31, 2010

State Bank of India CDS rise on new CDs from 3G auction

State Bank of India (SBI) credit default swaps are seeing increasing activity as the main bank involved in financing India’s latest 3G wireless spectrum auction a couple weeks ago is expected to provide up to 20,000 crores (~ US$4.5 billion), of the total 35,000 crores being funded by the country’s banks, by today. In order to fund this commitment, SBI and other banks have driven a surge in certificates of deposit (CDs) issuances.

SBI stock has constantly been an actively traded security on the BSE and is currently up about 1.5% to 2,260 rupees (US$50) per share as of writing time. The State Bank of India credit default swap price is up about 15 bps, or 8%, to 205 bps in trading today. Less than a month ago, SBI CDS was trading at 150 bps, however, the current levels are still below the highs of close to 250 bps reached last week when the 3G auction results were first made public. They are also far from the record highs above 400 bps reached after the Mumbai terror attacks in November 2008. The Financial Express reported that at that time, SBI CDS reached 440 bps. SBI credit default swaps began 2010 just over 100 bps.

The government’s bank account will see a total almost 677 billion rupees (US$15 billion, which is the total of all the bids) hit its bank account today as none of the winning bidders requested an extension to the payment deadline. SBI stated it is funding the majority of the bank-funded portion of the bids. On May 23, 2010, SBI announced it has reserves of about 40,000 crore of which 20,000 crore will be used to lend to wireless operators to pay the government their bids.

Given SBI’s significant size and status in the Indian banking market, many market participants and investors fear such a large and immediate decrease in SBI’s available reserves as well as the reserves of other major banks participating in the lending including Allahabad Bank, Bank of Baroda, Central Bank of India, Dena Bank, State Bank of Hyderabad, among others,United Bank of India and Vijaya Bank, will drain liquidity in the banking system. With this money going straight to the government and not flowing back into the banking system, investors fear that the demand for cash could significantly rise and cause interest rates (primarily short-term rates) to jump.

Call money rates (rates that banks lend to each other) are currently trading close to the reverse repo rate of 3.75% (interest rate RBI pays to borrow from banks). Mohan Shenoi of Kotak Mahindra Bank expects the call money rate to rise in June to the current repo rate of 5.75% (interest rate banks pay to borrow from RBI).

The ET noted that “interestingly, although liquidity is becoming scarce, demand for government securities have not fallen. Dealers say that this is because banks need to hold government securities, which are offered as securities to RBI for borrowing. Yield on the 10-year paper-7.80 maturing in 2020 closed at 7.40%, down from 7.50% earlier last week.”

The effect on other borrowers may be felt in the sub-benchmark prime lending rate (sub-BPLR) due to the rise in short-term interest rates. SBI chairman O P Bhatt recently said he saw the sub-BPLR rate rising 25-50 bps.

Government officials, however, are saying that foreign investment (both on the part of the wireless companies bidding for spectrum as well as from investors in general) will offset the internal liquidity shock.

Deputy Governor K C Chakrabarty of the Reserve Bank of India (RBI) has promised that they will ensure adequate liquidity in the banking system during this time including the use of a second temporary Liquidity Adjustment Facility (LAF) available until July 2, 2010.

Still markets are taking a cautious view. The Reuters price of 3-month Certificates of Deposit (CDs) have risen to a local 2-month high of 5.5%. It was 4.65% just a few weeks ago on Friday May 14, 2010. SBI, a rare issuer of short-term debt, has issued 1,000 crores of CDs, half of that in a 3-month certificate of deposit paying 5.4%.

While SBI has publicly stated that the issuance is to due to a mismatch in liabilities at a non-bank subsidiary, investors are taking the bank’s actions to mean more than words when it comes to needing money. SBI has also just come off reporting the results for its last fiscal quarter and the year ending March 30, 2010. The bank was quoted saying the “worst is over” in terms of its rising bad debts that brought down profit 32% this year.

Other banks are also participating in the CD issuance boom. A sampling of some of the other offerings according to Reuters,

- Central Bank of India raised 6.5 billion rupees in a 3-month issue paying 4.70% maturing on Aug.10, 2010, and 4.5 billion rupees in a 6-month issue paying 5.45% maturing on Nov.2, 2010.

- ING Vysya Bank raised 1 billion rupees in a 6-month offering maturing on Nov.16, 2010 paying 5.67%.

- State Bank of Hyderabad raised 3.5 billion rupees in a 1-year CD offering paying 6.25% maturing on May 11, 2011.

- United Bank of India raised 3 billion rupees in a 3-month issue maturing Aug. 6, 2010 paying 4.78 percent.

- Punjab & Sindh Bank raised 2 billion rupees in a 6-month issue maturing  Nov. 1, 2010 paying 5.49 percent.

- Syndicate Bank raised 7.25 billion rupees in a 3-month issue maturing Aug. 20, 2010 paying 4.73%.

- State Bank of Patiala raised 3 billion rupees in a 1-year issue maturing May. 13, 2011 paying 6.30%.

- State Bank of Travancore raised 1 billion rupees in a 9-month issue maturing Jan. 10, 2011 paying 5.82%.

- IDBI Bank raised 1 billion rupees in a 1-year issue maturing May. 24, 2011 paying 6.45%.

The Economic Times estimates that 45,000 crores of the total will be funded by loans, and the balance, or 22,500, by existing cash reserves. Of this 45,000 crore portion from loans, about 25% of that, or 11,000 crores, has been raised through commercial paper issuances by the 7 winners. “The fact that all auction-weary mobile firms have lined up funds, it erases fears of defaults as witnessed in Europe earlier this decade when mobile firms that had bid for radio frequencies were unable to meet their commitments.”

India’s Wireless Market Frenzy

India’s wireless market is the world’s second largest by users and the world’s fastest growing mobile market. The country is adding 20 million new users – or approximately the population of Australia – per month with this rate of growth expected to continue or even increase for the next few years.  The opportunity, interest and importance being attached to this market was clearly evident in the 3G wireless auction results held on May 20, 2010 by the Department of Telecommunications. In it, the government garnered and estimated 67,719 crore rupees (US$15 billion) which was about double early expectations.

All major wireless companies in India participated and each of the 22 wireless zones being auctioned off were competitively bid.  None of the winning bidders won all of the zones but this won’t be a major issue for them since they won in the major metros where it is more important. Right now the fastest growth is primarily occurring in rural areas where the demand or usage of more expensive 3G offerings like faster data is unlikely to be as strong.

The largest winners were Bharti Airtel, Reliance Communications and Aircel which won bids in 13 of 22 circles. Idea Cellular won 11 circles, Vodafone and Tata Indicom followed with 9 circles each. Much smaller STel won 3 circles. The hotly contested Delhi and Mumbai metro areas took in 3,320 crores (US$740 million) and 3,250 crores, respectively (US$720 million). State-owned Bharat Sanchar Nigam Ltd. (BSNL) & Mahanagar Telephone Nigam Ltd. (MTNL) did not have to bid in competition with the private operators but the amounts they will shell out (Rs 10,186 crore and Rs 6,564 crore, respectively) for their spectrum were determined by the outcome of the private competitive winning bids.

Despite the massive publicity being generated by the recent 3G auction, India is still not finished. They are currently in the middle of another auction of broadband wireless spectrum (BWA) which has so far brought in over 18,000 crore (US$4 billion) in just 5 days of bidding or more than the initial target of 15,000 crore (US$3.3 billion). The Indian DoT has since revised expectations to the range of 30,000-40,000 crore (US$6.7-8.9 billion).

BWA spectrum can be used for wireless technologies such as Worldwide Interoperability for Microwave Access (WiMax) or TD-LTE to connect devices such as laptops and computers aside from just mobile phones. In a country such as India, with a significant part of the population without any kind of incumbent wire into the home, owners of this spectrum will have one lockdown on of the only universal ways to reach the large masses of consumers across the country.

CreditLime Financial News Bureau