[T.S.R:18025] SBI, ICICI and HDFC Bk Could Sink Under USD Bond losses, Precious Metals Trading

SBI, ICICI and HDFC Could Sink Under MTM losses on their USD Bonds & Trade in Gold/Silver

The country's largest Banks-SBI, HDFC and ICICI could see future earnings get roiled by severe losses on the funds these banks have raised through USD denominated Bond issuances in Europe. For instance, the USD Medium Term Note programme of SBI alone works out to over $10 Bn. Banks, both in the private and public domain routinely raise Euro Dollars to fund their TierII capital. While the funds so raised are likely to fund trade based lines denominated in US Dollars, but being seamless the funds so raised could also get lent to domestic borrowers, bringing the currency risk upon the books of banks. For instance, a 20 per cent slide of the Re/USD implies a hit of nearly Rs 10,000 crore for SBI. Similar losses would come the way of other banks most significantly ICICI, which has substantial overseas operations. Dodgy accounting practices in the past have helped the Banks hide these losses under adjustments to existing reserves. But the recent near 20 per cent decline of the Rupee against the USD since August 2011 will be hard to hide.

 

Significant but sizeable losses should come the way of Banks against their trade portfolios of Gold and Silver coins. Just to prove and pin-point a fact, Gold sold by PSU banks works out to Rs 3400 per gramme against a NSEL Gold trade for delivery working out to Rs 2900 a gramme. Similarly, Banks are selling Silver coins and bars for an approximate price of Rs 80000 a kg, against NSEL Silver for delivery price of Rs 55000 gms. If Banks have built Gold and Silver inventories at much higher price that prevailed in May and August 2011, then they would be expected to notional losses on these metals in the FY12 results. Unless, ofcourse the RBI allows them to get away scot free by fudging their Book Value .

 

Investors must note that USD, Yen and Yuan Borrowings are a normal for large banks. These are meant to fund the GOI, and Oil Company imports and are signficantly different from ECB issuances made by private and public sector entities, often backed by back-stop facilities provided by the domestic banks.

 

Now we have a scenario where the RBI intervenes and settles the exchange liabilties of these banks through utilisation of its FX Reserves or let the Banks and Corporates fend for themselves. If the RBI intervenes, it runs the Risk of running down it's $300 Bn in Reserves painstakingly built over the past 15 years. If the Reserves get run down, it will be a massive negative for FIIs who have roughly $ 280 Bn in exposure to Equities in India and another $93 Bn in ECB subscriptions. All hell can get loose in the short term, so Buyers of banking stocks better beware.

 

Ongoing Borrowings

Country''s largest lender State Bank of India, which was recently downgraded by ratings agency Moody''s, will decide on an over USD 500 million bonds issue next month. "That''s a call we would be taking in November ... whether to go for it at all, and if we do decide to go in, then the extent of the amount," the bank''s Managing Director for International Banking, Hemant Contractor, told reporters today.

 

He said it would be a "benchmark issue", which normally means the minimum issue size would be of at least USD 500 million. The bank had earlier announced it would double its MTN borrowings to shore up the tier-II capital to USD 10 billion this fiscal. SBI Chairman Pratip Chaudhuri had in September hinted at raising over USD 1 billion in November, but sounded sceptical following the downgrade by Moody''s.

 

On October 4, Moody''s Investors Service had cut the rating on SBI''s financial strength to D+ from C- and pointed to issues with asset quality and lower capital adequacy. Ratings downgrades usually increase borrowing costs for financial institutions.

Contractor said the rates had gone up in international markets due to lower liquidity conditions, but did not answer when asked if the downgrade would have a bearing on the bank''s plans.

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