By a complex overseas gauge that measures risk of defaults on loaned cash, ICICI Banks bond buyers would seem to be in a bit of discomfort even as Indias biggest private-sector lender reshuffled its top deck to prevent further speculation about the occupant in its corner room.
The Credit Default Swap (CDS) contracts on the lender, which has chosen a new COO to head it during the forced absence of the CEO, have surged about 26% since March 28, when reports about the alleged conflict of interest involving the banks executive head first appeared in the national mainstream media.
Contracts on the CDS, a shield against the likely default on outstanding debt securities by an issuer, are only available offshore, although liquidity in the instruments is not always high. But it is the only gauge of investor risk appetite. The five-year matrix is relatively liquid among other maturity contracts.
The five-year CDS gauge has climbed to 126.39 from 100 March fourth week, the time around when the ICICI Bank crisis surfaced in national media.
Technically, this means an overseas investor pays 126.3 basis points or cents to buy an insurance against every $100 investment in ICICI dollar-denominated bonds. If the issuer defaults, the investors loss would be covered.
“The elevated CDS indicates that overseas debt investors may be losing faith in the bank,” said Ashutosh Mishra, a banking analyst at Reliance Securities. “ICICI bank has relatively law provision coverage ratio (PCR) as compared to other large corporate banks. This clearly indicates that profitability of the bank may remain under pressure in FY19.”
Mishra further said that a “change of guard at the top may accelerate this process of increasing PCR.”
ICICI Bank reported about Rs 7,000 crore provisions during the Jan-March quarter which, according to analysts, will likely rise.
The bank's PCR – excluding technical write-off – stood at 48.4% in March quarter this year versus vs. 48.3% a quarter earlier despite sharp rise in provisioning expenses, according to a Reliance Securities report.
Investor sentiment is generally weak for banks that are either facing a bad loan crisis or battling allegations against their top brass.
“CDS for most large Indian banks are increasing as the fear of bad assets has spooked investor confidence,” said the fixed-income head at an Indian securities company. “But investors have also taken note of the latest steps, which include a regime change.”
The five-year SBI CDS gauge rose about 14-15% between March fourth week and now.
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