Borrowing abroad to turn costlier for SBI

Following its financial rating downgrade by Moody's, raising funds will turn costlier for State Bank of India (SBI), in an already expensive overseas market. The bank's debt rating, however, remains unchanged at Baa2.

“The credit ratings incorporate Moody's unchanged assessment that the probability of systemic support for SBI, if needed, is very high, and results in a one-notch lift in its GLC deposit rating of Baa2 from its standalone rating of Baa3,” the rating agency said in a release.

We expect the near-term cost of funds to rise, particularly overseas borrowing rates, for SBI,” said ICICI Securities in a research note.

Also, as a result of unrest in the global investment environment, the cost of hedging against SBI's default is high. The bank's five-year credit default swaps are trading at a two-and-half year high of 363.9 basis points, according to data from Bloomberg. “It will be difficult to assess the impact of the downgrade on the bank's credit default swaps, as the bank's position was already factored in by investors,” said a senior official with a foreign bank.

However, the impact on overall cost of funds is expected to be limited, as external borrowings were at seven per cent of SBI's total funding liabilities. Last week SBI announced it had doubled the size of its overseas Medium-Term-Note (MTN) programme to $10 billion. Of this, the bank has already raised around $4 bn. The MTN programme enables the bank to raise funds at intervals, depending upon requirements.

The higher cost of borrowing for the country's largest lender may also mean higher costs for other Indian banks and companies willing to tap the market abroad. Presently, the rate on borrowings abroad for similar-rated Indian banks is between 375-400 basis points over Libor, the London Inter-bank Offer Rate. Banks like ICICI Bank, Axis Bank and HDFC Bank also share the same debt rating, of Baa2.

“The higher cost of borrowing for SBI would translate into higher cost for companies as well. No other bank or Indian corporate has tapped the overseas market in three months because of high interest rates amid global uncertainties,” said a senior official with a foreign bank.

 

Source: Business Standard