The Hindu Business Line : Foreign banks turn buyers of public sector bank bonds

Ample liquidity
Strong FDI, FII flows amid falling oil prices.
More banks planning bond issues.
IPOs in the pipeline to draw NRI, FII interest.

Bangalore , Nov. 24

Foreign commercial and investment banks have quietly begun picking up public sector bank's tier II and upper tier II bond issues.

Bankers said that the foreign banks were picking up the securities in anticipation of softening of yields, across all categories.

Among the issues that have evoked interest from the foreign commercial and investment banks were the recent issues of Oriental Bank of Commerce for Rs 250 crore and hybrid capital issue in the form of perpetual bonds.

This security currently carries coupon of 9.40 per cent. Issues picked up included those floated by UTI Bank for Rs 200 crore, priced at 9.35 per cent for 10 years and 9.85 per cent in the event of the call option not being exercised.

Increased liquidity

Bankers said the funds were coming into these bonds, partly in anticipation of increased liquidity in the financial markets. This liquidity, they said, would mostly be driven by foreign investment flows from direct investment, non-resident investment and FIIs. The rising liquidity was evident from the rising trade volumes in the NSE WDM (wholesale debt market).

Average trade volumes were up to Rs 2,000 crore, a six-month high. Besides, banks' recourse to the reverse repurchase window of the Reserve Bank of India has also seen a rising trend due to the liquidity build-up. On Thursday, the mop-up through the RBI's reverse repo window was over Rs 23,430 crore.

Arbitrage opportunity

Bankers said that some of the foreign banks were also using the banks' bonds as an arbitrage opportunity in view of the increasing liquidity - raising short-term resources at rates of 5.5 per cent and swapping the same for investing in the securities. Such transactions resulted in their earning spreads of close to 300 basis points.

Estimates are that over $100 million was flowing into the country on a net basis.

What was also contributing to the positive flows were the retreating international oil prices that was expected to benefit the current account balance of the country.

Bankers said that although the RBI was not keen on such flows in view of the strains imposed on sterilising the liquidity, there were few alternatives.

This was one of the reasons for keeping the spread between the repo band on the high side and enhancing the limit for domestic mutual funds to invest in foreign equity markets.

What was also likely to exacerbate the situation was the inflows caused by external commercial borrowings raised by the banking sector, inflows from NRI and other institutional investors for investing in the proposed mega initial public offerings of the three power sector entities, Power Finance Corporation, Power Grid Corporation Ltd and Rural Electrification Corporation, during the course of the year.

Besides, some more banking entities are also expected to tap the international capital markets for raising upper tier II bonds, particularly those planning large international presence.

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