Cost to cover default risks goes up for banks – The Economic Times

Clipped from: https://economictimes.indiatimes.com/industry/banking/finance/banking/cost-to-cover-default-risks-goes-up-for-banks/articleshow/82295319.cmsSynopsis

Credit Default Swaps (CDS), an insurance against default, tied to ICICI Bank and State Bank of India are now at elevated levels that were last seen during the peak of the first wave of coronavirus. The CDS rates seem to discount the market-beating earnings of private lenders for the fourth quarter.

The cost to insure against a potential default by Indian banks has risen about a fifth in the past two weeks as various states imposed local curbs on mobility and businesses.

Credit Default Swaps (CDS), an insurance against default, tied toICICI BankNSE 3.77 % andState Bank of IndiaNSE 2.93 % are now at elevated levels that were last seen during the peak of the first wave of coronavirus. The CDS rates seem to discount the market-beating earnings of private lenders for the fourth quarter.

“Global risk premiums for Indian lenders have gone up amid this volatility,” said Ganeshan Murugaiyan, head of investment banking for India at BNP Paribas. “The pace at which the second wave of coronavirus has impacted India has surprised several overseas investors that are closely monitoring its impact on business activity.”

One-year contracts of CDS for ICICI Bank have climbed as much as 47.42 Monday versus 28.35 on April 12, showed Bloomberg data. CDS data are not updated every day due to illiquidity. The surge is 1907 basis points in absolute terms, taking the gauge to an 11-month high. In the same period, US Treasury benchmark, a global gauge yielded a few basis points lower.

This means overseas investor risk perception has significantly gone up for these two local lenders. An overseas investor would pay 47.42 cents to buy insurance against every $100 investment in ICICI dollar-denominated bonds. If the issuer defaults, the investor’s loss would be covered.

Back home, ICICI Bank shares soared about 10% on the BSE during the same period. The bank reported an improvement in asset quality in its fourth-quarter earnings last week.

“The cost to insure against a potential default by Indian lenders has risen on concerns about the impact of the Covid situation on the Indian banks’ balance sheet and NPAs,” said Hemant Mishr, chief investment officer at Scube Fixed Income, a Singapore-based fund. “We expect the CDS spreads to come off once the pandemic situation is brought under control.”

State Bank of India’s one-year contract CDS yielded 36.31 Monday versus 28.42 two weeks ago on April 12. The differential or spread has widened 789 basis points. The current level is the highest at least since September last year, show ETIG compiled data.

Over the past two weeks, SBI shares rose over 4.5% on local bourses.

The sentiment in the CDS market slightly improved on Tuesday with the gauge falling a few basis points after the international community started sending Covid assistance to New Delhi.

“Also, potential credit concerns on a few Chinese names have added to the bearish sentiment across Asian markets,” said Murugaiyan from BNP.

Global investors have of late turned cautious on emerging market bonds. Huarong Asset Management, China’s biggest distressed debt investor that owes about $22 billion of dollar-denominated debt, has come under stress after Fitch downgraded it to triple-B from A. This has triggered a default scare.

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