Banks’ risk falls after government wins vote

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Jul 23 : The cost of default protection on India's largest banks, including State Bank of India and ICICI Bank Ltd, fell after Prime Minister Manmohan Singh won a confidence motion in the parliamentary vote late on Tuesday.

Indian shares rose on Tuesday in New York trading, on speculation the government may introduce laws to attract foreign investment. Singh avoided a defeat that would have led his government to collapse and prompt an early election before the current term ends in May.

“Ongoing political stability is positive for banks,” said Jason Rogers, a credit analyst at Barclays Bank Plc in Singapore. “Political turmoil is never good, particularly in a place like India, where just over 70% of the banking system is owned by the government.”

Five-year credit-default swaps on ICICI declined 20 basis points to 345 and contracts on State Bank fell the same amount to 230, according to JPMorgan Chase & Co prices. The cost to protect $10 million of ICICI debt from default is equivalent to $345,000 annually. A decrease in the price indicates improving investor perceptions of credit quality.

Credit-default swaps are used to protect against or speculate on default. They pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements.

“Foreign investors painted Indian banks with the same brush as US ones and they may begin to have a re-look,” said A Balasubramaniam, chief investment officer in Mumbai at Birla Sun Life Asset Management Co, which manages the equivalent of $9.6 billion in assets. “There could be an increase in the foreign holding limit in state-run banks.”

Overseas investors can now own a maximum of 20% in India’s state-run banks. The limit is 26% for insurance companies. Singh's former communist supporters opposed a plan to raise it to 49%.

Credit-default swaps on ICICI rose to 384 basis points on July 8, the highest since at least 2004, on concern loan profitability will decline as the central bank raises borrowing costs to combat accelerating inflation.