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Default risk at State Bank of India surges on bad debt concerns

[MUMBAI] The cost of insuring the bonds of State Bank of India (SBI) is surging before the nation's largest lender reports quarterly earnings on Thursday amid concern over worsening asset quality.

Credit-default swaps protecting the bank's debt against non-payment for five years jumped to 202 basis points on Tuesday, the highest since August 2014, according to prices data provider CMA.

The contracts, considered a proxy for the sovereign, have climbed 20 basis points in their biggest two-day advance since Jan 21.

Earnings at banks are under pressure as they boost provisions for stressed assets to meet a March 2017 deadline set by the Reserve Bank of India to bolster lenders' balance sheets.

The central bank is striving to pare the ratio of restructured and soured loans to total advances from a 14-year high and reverse a slowdown in lending.

ICICI Bank Ltd, State Bank's largest private-sector rival, last month posted its slowest quarterly profit growth in six years amid rising bad debts and a threefold increase in provisions.

"Investors are worried about a possible surge in the bad loan provisions at SBI," said Hatim Broachwala, Mumbai-based banking analyst at Nirmal Bang Institutional Equities Ltd.

"A sharp deterioration in asset quality at state-run banks that have reported earnings so far has added to this concern."

Sovereign bonds funds set aside for bad loans at Punjab National Bank doubled in the quarter ended Dec 31 over the previous three months, the New Delhi-based lender said in a filing Tuesday.

Its soured debt ratio also widened. Mumbai-based Dena Bank Ltd posted a threefold increase in provisions, swinging to a quarterly loss. SBI will report a net profit of 33 billion rupees (S$667.5 million), according to the mean estimate in a Bloomberg survey.

The lender's shares fell 2 per cent to 163.65 rupees in a second day of declines in Mumbai on Wednesday, taking their 2016 loss to 27 per cent. That's about three times the drop in the nation's benchmark S&P BSE Sensex stock index.

Indian sovereign bonds rose Wednesday, driving the yield on notes due May 2025 two basis points lower to 7.82 per cent, according to prices from the central bank's trading system. The rupee weakened 0.1 per cent to 67.95 per dollar.


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