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Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Debt Capital Markets

State Bank Of India / Debt Capital Markets

We see fair value at T+150 for <a href="https://www.smartkarma.com/entities/state-bank-of-india" target="_blank" data-smartkarma-citation="entities:160:1" rel="noopener">State Bank of India (SBIIN)</a> new 5.5-year senior unsecured US$-bond in the current market environment, despite the difficulties facing India post-COVID-19. This bond was marketed with an initial price talk of 175 basis points (bps) over similar maturity Treasuries. Our enclosed relative value assessment is based on bond spread comparisons with regional peer banks and entities tied to the Republic of India. We anticipate that market demand may drive this bond inside fair value as global monetary accommodation pushes investors down the credit curve. Although BBB- rated SBIIN operates a capital-light franchise, with a Common Equity Tier 1 ratio of only 10.8%, the real risk to bondholders is another rating downgrade. Negative outlooks placed on India by Moody’s and Fitch in June suggest the significant risk of a downgrade over the next 12 months. A non-investment grade rating would reduce the population of investors that are able to own this security. Given these dynamics, we believe that you buy this bond to own it and not to trade it over the long term.Concurrently, in an act of bad timing, Moody's withdrew a rating on SBIIN while the bank was marketing the new senior unsecured note. Moody’s withdrew its P-3 short-term rating on State Bank of India and its branches. The rating agency cited business reasons. This is code for the fact that SBIIN was not paying for this rating and should not be confused with anything related to the fundamental credit strength of the institution.

We see fair value at T+150 for State Bank of India (SBIIN) new 5.5-year senior unsecured US$-bond in the current market environment, despite the difficulties facing India post-COVID-19. This bond was marketed with an initial price talk of 175 basis points (bps) over similar maturity Treasuries. Our enclosed relative value assessment is based on bond spread comparisons with regional peer banks and entities tied to the Republic of India. We anticipate that market demand may drive this bond inside fair value as global monetary accommodation pushes investors down the credit curve. Although BBB- rated SBIIN operates a capital-light franchise, with a Common Equity Tier 1 ratio of only 10.8%, the real risk to bondholders is another rating downgrade. Negative outlooks placed on India by Moody’s and Fitch in June suggest the significant risk of a downgrade over the next 12 months. A non-investment grade rating would reduce the population of investors that are able to own this security. Given these dynamics, we believe that you buy this bond to own it and not to trade it over the long term.Concurrently, in an act of bad timing, Moody's withdrew a rating on SBIIN while the bank was marketing the new senior unsecured note. Moody’s withdrew its P-3 short-term rating on State Bank of India and its branches. The rating agency cited business reasons. This is code for the fact that SBIIN was not paying for this rating and should not be confused with anything related to the fundamental credit strength of the institution. 

State Bank of India: New 5.5-Year Senior -  Until Downgrade Do Us Part