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Tuesday, 01 May 2012 02:38
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Moody's warning on top banks can mean higher costs
While finance ministry mandarins continue to think they can get global credit rating firms to raise India’s rating in view of its relative economic performance—the finance ministry’s Comparative Rating Index of Sovereigns (CRIS) shows India’s CRIS ranking has gone up from 61st to 55th between 2007 and 2011—Moody’s Investors Service has just commenced a 3-month-long exercise that could result in a fall in the standalone ratings of the only banks in the country that are still rated above India’s sovereign rating. Along with public sector insurance firm LIC, Moody’s announced a review of ICICI Bank, HDFC Bank and Axis Bank to see if their ratings need to be downgraded. At Baa2, they are a notch above India’s Baa3 rating—SBI, which was also Baa2, was downgraded to Baa3 late last year. Moody’s move doesn’t automatically mean a rating cut but given how the rating agency has drawn attention to an earlier publication—“How sovereign credit quality may affect other ratings”—a downgrade does look likely. In the case of LIC, Moody’s press release talks of how the review for downgrade reflects “LIC’s direct exposure to the Indian sovereign risk in terms of its investment portfolio and business profile”. Moody’s talks of how “LIC has been increasing its exposure to public sector banks through equity investment, in addition to the purchase of shares in Oil and Natural Gas Corporation Ltd which is 69.14% owned by the Indian government in March 2012.”
It is difficult to say how much a downgrade, if it happens, will raise borrowing costs for these banks, more so since the foreign currency long-term senior unsecured debt ratings are unaffected, as Citi points out—indeed, the possible ratings cut is not related to any fundamental deterioration in the banks’ finances, but is more a function of what is happening in India. Intuitively, however, it does seem borrowing costs will rise if their ratings are cut—if it didn’t, why do banks want to be rated a notch or two higher than the country ratings? Coupled with the pressure put by S&P’s decision to lower India’s outlook, there can be little doubt banks will have to raise funds abroad at higher rates. Clearly, no one is buying the government’s talk about India’s fundamentals and long-term prospects looking relatively robust. As for CRIS, it’s a good time to give it a quiet burial.

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