Bond valuation norms drag Nifty Bk, but large bks' outlook positive

Bond valuation norms drag Nifty Bk, but large bks' outlook positive

Informist, Friday, Mar 19, 2021


By Ajay Ramanathan


MUMBAI – A recent circular by the Securities and Exchange Board of India on investment into bank bonds has spooked investors, triggering a fall in banking stocks. Investors are already jittery over the issue of non-performing loans in the banking sector.


Earlier in March, SEBI directed mutual funds to value perpetual bonds or additional tier-I bonds at 100 years, in a departure from the current practice of considering the call option date of the bond, usually the end of the tenth year, for valuation.


The regulator also capped mutual funds' investment in debt securities at 10%. Of this, it capped exposure to instruments by a single issuer at 5% of net asset value of the debt portfolio. The changes will come into effect on Apr 1. 


Since the circular, the Nifty Bank index has shed around 6%, dragged down by the 1-12% fall in shares of mid- and small-sized banks and 5-10% decline in stocks of large banks.


Today, the Nifty Bank index closed 0.9% higher at 34161.60 points on the National Stock Exchange due to bargain buying.

The index is seen moving in the range of 33000-34000 points next week, though a sharp uptrend is likely beyond the 34,500-point mark, a technical analyst at a domestic brokerage said. 


Dealers said concerns persist, especially over the ability of mid- and small-sized banks to raise funds, given the market regulator has not withdrawn its circular despite issues raised by the government. 


The finance ministry has sought withdrawal of the valuation norms for mutual fund houses as it will hit fundraising by state-owned banks and make them reliant on government's capital support. The ministry, in fact, called the clause on valuation disruptive in nature.

The abrupt drop in valuation is likely to lead to large swings in net asset value and potential disruption in debt markets as mutual funds will look to sell these bonds anticipating redemption, triggering panic in debt markets, the ministry said.


Analysts, too, believe the revised norms will reduce mutual funds' appetite for additional tier-I bonds because closed-ended schemes will no longer be able to invest in such papers.


Mutual funds are among the largest investors in perpetual debt instruments, and hold over 350 bln rupees of the outstanding additional tier-I bond issuances of 900 bln rupees.


“The yields on these bonds have already seen an upward trend since the circular was issued with an increase in traded volumes reflecting selling of these instruments. With constraints on investment limits, the funds may even become more selective in taking fresh exposures in such instruments,” ICRA said in a note.


The rating agency estimates public sector banks' capital requirement at 430 bln rupees in the next financial year, more than double the budgetary allocation of 200 bln rupees. Of the total requirement, the rating agency expects 230 bln rupees to be spent on call option on tier-I bonds. 


Analysts believe if public sector banks are unable to replace such callable tier-I bonds with fresh issuance, an already fiscally-strapped government will be forced to recapitalise them. 

The lack of capital support could also force the banks to curtail credit growth. 


Analysts, though, believe the long-term outlook for large banks like ICICI Bank Ltd, State Bank of India and HDFC Bank Ltd is positive. This is because of their improving return ratios, healthy capitalisation levels and opportunity for market share gains, brokerage firm JM Financial said in a report Wednesday. 


The regulator's latest circular is unlikely to have a negative impact on well-capitalised banks in the long-term, said Kedar B, fund manager at Composite Investments Pvt Ltd.




Edited by Charumathi Sankaran


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