PSU bank bonds gain as mergers set to boost credit profiles

Weaker banks are the biggest beneficiaries of the mergers, says analyst. (Photo: Ramesh Pathania/Mint)

Mumbai: Indian state-run banks’ rupee debt is gaining as proposed mergers and capital injection by the government are set to bolster credit profiles of these lenders.

Canara Bank and Union Bank of India, which are part of a merger plan announced by the government, have seen the yields on their rupee bonds fall as much as 7 basis points this week, according to pricing data provided by Crisil, people familiar with the matter said. Outstanding rupee debt securities of the 10 lenders being combined totals more than $13 billion, data compiled by Bloomberg show.

The move to combine 10 lenders to create four and an infusion of 55,250 crore ($7.7 billion) into them, announced by Finance Minister Nirmala Sitharaman last week, would boost their risk buffers and help in the battle against world’s worst bad debt pile. Worsening asset quality has been a hindrance to raising capital by state-run banks, constraining their ability to grow loans and bolster profits.

The yield on Canara Bank’s 8.4% notes due April 2026 fell to 7.86% Thursday, compared with 7.9% August 30, according to data from Crisil. The yield on peer Union Bank of India’s 8.9% notes due 2022 declined to 7.66% versus 7.69%, the data show.

“Weaker banks are the biggest beneficiaries of the mergers. They are likely to benefit from lower bad-loan ratios of the merged entities,” according to Sandeep Agarwal, manager of fixed-income at Sundaram Asset Management Co. in Mumbai. “With these mergers, bank bonds are looking very attractive at this time given the yields they are offering compared to other issuers.”