Indian banks, finance companies can endure potential contagion effects from SVB, Credit Suisse events: S&P

Indian banks and rated finance companies can endure potential contagion effects from the demise of Silicon Valley Bank (SVB) and UBS’ hasty takeover of Credit Suisse AG, according to S&P Global Ratings.

The global credit rating agency noted that Indian institutions have no meaningful direct exposure to SVB, Signature Bank and Credit Suisse. 

S&P Global Ratings expects the secondary impacts to be manageable, although the decision to write-off Credit Suisse’s Additional Tier (AT)-1 bonds may contribute to a higher cost of capital for banks.

Only a significant escalation would lead the agency to change its view.

S&P observed that strong funding profiles, a high savings rate, and government support are among the factors that bolster the financial institutions it rates.

Further, banks have sufficient buffers to withstand losses on their sizable government securities portfolio resulting from rising interest rates.

AT-1 bond market polarised

Brokerage firm Jefferies, in a report, said, the Additional Tier (AT)-1 bond market has polarised towards large/ quality banks post the writedown of these bonds aggregating ₹8,415 crore by Yes Bank in the fourth quarter of FY20.

This observation comes in the backdrop of UBS’ acquisition of the troubled Credit Suisse entailing a write-down of the latter’s AT-1 bonds aggregating $17.2 billion.

“India had a Credit Suisse like AT-1 bond issue right around Covid when Yes Bank wrote-down AT-1 bonds and still there was some franchise value assigned to equity through capital infusion by leading banks/ NBFC.

“Since then, the issuances have been lower and market has become polarised towards larger/ quality banks,” Brokerage firm Jefferies said in a report.

Among banks, top-3 issuers are State Bank of India (SBI), HDFC Bank and Canara Bank with public sector banks (PSBs) having higher contribution from this.

PSBs have a higher share of AT-1 bonds in capital structure compared to private sector peers, Jefferies said.