News: Indian banks ride on growth story

(DNA 18/01/2007) Mumbai - Banks are finding it easier to raise money abroad as news of the economy’s growth catches up overseas, boosting demand for Indian paper.

State Bank of India (SBI), India’s largest bank by assets and deposits, was the latest one to take advantage of this route for raising capital, raising $200 million through floating rate bonds at 45 basis points above the three-month Libor. It is paying 5 basis points lower interest compared to the $300 million five-year bonds it had issued in Singapore in December 2006.

“SBI thought of taking advantage of the momentum in the market after the $2 billion ICICI issue. SBI didn’t really need the money but they wanted to set a benchmark rate looking at the opportunity. This rate is the best any Indian bank has ever borrowed at,” said an official involved with the deal. Deutsche Bank was the sole arranger for the deal. “Investor interest is strong for a SBI paper because investors believe that SBI has the full support of the government and the RBI and it is too big to fail, the official added.

“The price is better than last time when the bonds were priced at 50 basis points above Libor,” added another official from a UK bank based in Singapore who is familiar with the deal details. SBI is not the only bank keen on tapping the international market. ICICI Bank, the country’s second-largest, UTI Bank, a middle level private sector bank and state-owned Canara Bank have also tapped the overseas markets recently.

Analysts say that urgency among Indian banks to raise money has increased due to the tough Basel II capital requirements likely to be implemented from March 31, 2008.

Floating rate bonds are priced when the issuing bank (in this case SBI) expects interest rates to drop so that the interest it pays on the bonds lessens over a period of time. These bonds come under Tier II capital which is subordinate debt. “The capital being raised is primarily to add to the banks capital base and may be used for lending purposes,” said Robin Roy, principal consultant, PricewaterhouseCoopers.

Banks are struggling to keep up with the robust credit growth as the economy maintains a scorching pace of growth. “Indian banks have done a very good job of tapping the overseas markets and, with expectations that the country’s ratings would be upgraded to investment grade, demand for papers from the country is expected to be strong,” the Singapore based banker said.

India’s economic growth accelerated to 9.2% in the third quarter, a pace only China exceeded among the 20 largest economies.

Successful issues like this one are also likely to benefit other Indian banks to raise money from abroad. SBI benefited from the strong response to ICICI Bank’s $2 billion issue last week, which saw a demand of $8 billion.