SBI, associate banks surge after Cabinet okays merger

NEW DELHI: Shares of SBI and its associates rose sharply by as much as 13.5 per cent today after the Cabinet approved their merger, a step aimed at strengthening the sector through consolidation of public banks.

The scrip of State Bank of Mysore soared 13.54 per cent, State Bank of Bikaner and Jaipur zoomed 10.86 per cent, State Bank of Travancore jumped 10.54 per cent while SBI gained 3.10 per cent on BSE.

Seeking to create a global-sized bank, the Cabinet yesterday gave the go-ahead to the merger plan of SBI and its five associates.

However, no decision was taken on the proposal to merge the Bharatiya Mahila Bank with SBI.

Latest Comment

Excellent news for banks. Now time to merge all small and loss making banks into BOB and PNB for cost cutting.RaMa Rajya

The merger of associate banks is likely to result in recurring savings, estimated at more than Rs 1,000 crore in the first year, through a combination of enhanced operational efficiency and reduced cost of funds, an official statement said.

The two unlisted associate banks which will be merged with SBI are State Bank of Patiala (SBP) and State Bank of Hyderabad (SBH).


Banks rush to buy cyber security cover as digital payments rise

Representative imageRepresentative image
MUMBAI: At a time when cyber threats are on the rise for banks for increasing cashless transactions and effects of demonetization, insurers see rise in demand for cyber insurance and cyber liability insurance, in particular.

This is despite the fact that the industry base for cyber insurance is currently as low as Rs 60 crore.

There are various cyber insurance covers available in the country, but it is the cyber liability insurance which is in maximum demand for the banks, say insurers.

Non-life insurers that provide cyber insurance cover include New India, National, ICICI Lombard, Tata AIG, HDFC Ergo and Bajaj Allianz.

Country’s largest lender State Bank of India (SBI), which fell victim to cyber frauds some time back, is now considering insurance to protect its 30 crore customers.

“We have always seen maximum security in all our IT systems. We are now considering to avail cyber insurance covers for our customers,” SBI managing director Rajnish Kumar told PTI here.

“We are actively examining the issue. The only thing that we have to ensure is that insurance costs fit into our scheme,” he added.

Recently, in one of the biggest ever breaches of financial data in the country, customers of 3.2 million debit cards belonging to different banks were hit by cyber frauds where their ATM details were compromised. Several victims even had reported unauthorised usage from locations in China.

The worst-hit card-issuing banks in the episode included SBI, HDFC Bank, ICICI Bank, YES Bank and Axis Bank.

Banks either had to replace or asked users to change the security codes of as many customers. Even though SBI didn’t suffer any big financial losses due to the data compromise episode, still as a precautionary measure, it had blocked 6 lakh debit cards.

Bank of Baroda, which had seen around 1 lakh of its debit cards being compromised in the recent episode, is also keen to go for such insurance covers in future.

“We are here to ensure protection of our customers and hence we will definitely go for cyber insurance cover as and when it was required for the bank,” Bank of Baroda MD & CEO, PS Jayakumar said.

Insurers said they do see uptick in demand for cyber insurance covers by banks.

Latest Comment

Most essential one for the current cyber threat happenings. Banks should have gone for it long ago. Yet, it is not too late for them to adopt to the international standard of security to which they need to invest in.Godfather Senior

“We are in talks with quite a few banks to provide cyber insurance cover to them,” New India chairman and managing director, G Srinivasan said without divulging any details.

“Cyber threat is on the rise in recent times for the banks and hence they must go for cyber insurance cover,” he added


Sensex ends lower post RBI policy review, banks hit hard

(Representative image)(Representative image)
MUMBAI: RBI’s decision to keep rates unchanged caught the stock markets off-guard on Wednesday with a sharp plunge in the Sensex within minutes of the policy announcement amid a heavy pounding of bank stocks, but a quick recovery saw the index limiting its losses at just 45 points.

NSE’s Nifty index fared better by closing with a marginal 0.75-point gain at 8,769.05. BSE’s Sensex ended the day 45.24 points lower at 28,289.92, after recouping a large part of its intra-day loss of 186 points.

Contrary to market expectations, RBI left interest rate unchanged at 6.25 per cent, and shifted the policy stance to ‘neutral’ from ‘accommodative’. Governor Urjit Patelon Wednesday lowered the GDP growth forecast to 6.9 per cent for 2016-17, but its growth projection of 7.4 per cent for 2017-18 reassured investors to an extent, which restricted the fall.

Some fag-end buying in banking and other stocks helped the Sensex recover, which settled down 0.16 per cent. The gauge had lost 104.12 points in the previous session.

The wider Nifty, however, ended up 0.01 per cent.

“With banks passing on past RBI cut rates, status quo was maintained, but the change in policy stance to neutral and the projection of a 7.4 per cent growth for 2017-18 is a sign that RBI expects economy to swing back swiftly… This in turn was reflected in the short covering towards the close,” said Anand James, Chief Market Strategist, Geojit BNP Paribas Financial Services.

The reverse repo rate — at which RBI absorbs excess liquidity — is retained at 5.75 per cent.

Meanwhile, the rupee continued to trade higher at 67.19 against the American currency by jumping 22 paise, which supported the late recovery.

Interest-sensitive stocks took a hammering, dragging the BSE banking index down by 0.37 per cent. PNB, Axis Bank, ICICI Bank, Kotak Bank, IndusInd Bank, Bank of Baroda and SBI and ended lower by up to 1.32 per cent in a knee-jerk reaction to the RBI decision.

Other laggards were Dr Reddy’s, Sun Pharma, Hero MotoCorp, Infosys, ITC, NTPC, Tata Steel, RIL, Maruti Suzuki and HUL.

Out of the 30-share Sensex pack, 15 ended lower while 14 led by Coal India, GAIL, M&M, Lupin, Tata Motors, Cipla, TCS and Wipro finished higher that cushioned the downfall.

Sector-wise, the BSE FMCG index fell by 0.39 per cent, healthcare 0.26 per cent and IT 0.18 per cent.

In contrast, broader markets were in a better shape, with the mid-cap index rising 0.51 per cent and small-cap up 0.22 per cent.

Foreign portfolio investors (FPIs) bought shares worth a net Rs 201.13 crore on Tuesday, as per provisional data.

Other Asian markets closed higher, with Japan’s Nikkei, China’s Shanghai Index and Hong Kong’s Hang Seng all advancing. European markets too were trading in the positive space.


Ancient Silk Road revival plans could be the new risk to Chinese banks

China’s expansive overseas infrastructure lending through the One Belt One Road (OBOR) initiative could create new asset-quality risks for its banking system, Fitch Ratings warned.

Launched in 2013, the Xi Jinping-backed initiative aims to revive the ancient Silk Road and strengthen Chinese ties with more than 60 countries across Asia, Europe and East Africa through infrastructure, trade and investment.

The attraction to China is opening up vast areas of Central Asia that still retain trade links established centuries ago to routes in South Asia, Persia, Arabia and Africa, but now often lack the modern infrastructure needed to attract large-scale investment and trade.

But Fitch said this global project might be more about China’s strategy to extend its global influence, rather than meeting the infrastructure needs of countries involved or commercial logic.

'One Belt, One Road' projects may not deliver returns: Fitch

‘One Belt, One Road’ projects may not deliver returns: Fitch  Thursday, 26 Jan 2017 | 8:46 PM ET | 02:03

China’s wide-ranging infrastructure projects with developing countries along the Silk Road link that are planned or underway, have an estimated worth of more than $900 billion, analysts at Fitch Ratings said in a report.

On Thursday, S&P Global ratings affirmed ‘AA-/A-1+’ sovereign credit ratings on China, while noting government moves to take on debts run-up by local government has “significantly reduced the banks’ credit risks, in our view.”

But even with the Asian Infrastructure Investment Bank (AIIB) to support the funding needs of the OBOR and China’s pledged $40 billion Silk Road Fund, most of the capital will likely come from Chinese policy banks or large commercial banks.

“One Belt One Road’s emphasis on large-scale capital-intensive infrastructure investments abroad is aimed at channeling surplus domestic savings away from less productive domestic uses and at relieving overcapacity pressures,” Jack Yuan, associate director at Fitch Ratings, told CNBC.

“Since the bulk of China’s savings are concentrated in the banking system, it is only natural that banks should provide most of funding for OBOR,” Yuan explained.

China’s three policy banks – Agricultural Development Bank of China (ADBC), China Development Bank (CDB), and the Export-Import Bank of China (Chexim) – have been given ‘A+’ ratings by Fitch Ratings, while its largest commercial banks have ‘A’ to ‘A+’ ratings.

Overseas loans from Chinese banks are estimated to be worth $1.2 trillion, of which a large portion has gone to financing infrastructure projects involving Chinese state-owned enterprises, the report said.

But these projects might fail to deliver expected returns as political motivations take priority over the commercial viability of some OBOR projects, the ratings agency warned.


Fitch added that Chinese banks have a poor track record of allocating resources efficiently, and policy banks tend to have poorer disclosure compared to commercial banks and non-Chinese development banks.

Problem loans and bad debts can also take a while to emerge as these infrastructure projects tend to have a long time frame, one analyst told CNBC.

“So, while initially banks and Beijing can handle loading up on exposure to these projects, it’s the longer term management of the loan book and risk tools used that will be key to ensure they don’t get bogged down with non-performing debt,” said Gavin Parry, managing director of Parry International Trading.

Countries with identifiable OBOR projects are Laos, Bangladesh, Azerbaijan, Pakistan, Tajikstan and Kyrgyzstan, to name a few.

The sovereign rating of countries under the OBOR umbrella can actually act as a guide to the creditworthiness of a particular project, although the ratings are of speculative grade, Fitch said.


China cuts reserve ratios for big 5 banks temporarily amid cash crunch: Sources

People withdraw money from an ICBC branch in Beijing.

Zhang Peng | LightRocket | Getty Images
People withdraw money from an ICBC branch in Beijing.

China has allowed its five biggest banks to temporarily lower the amount of money that they must hold as reserves to relieve pressure in its financial system as demand for cash surges ahead of the Lunar New Year holiday, three sources with direct knowledge of the matter said.

The People’s Bank of China (PBOC) has cut the reserve requirement ratio (RRR) for the banks by a full percentage point, taking the ratio down to 16 percent, the sources said.

The central bank’s move, its first reduction in RRR in nearly a year, comes after it pumped a record amount of liquidity into markets this week in a bid to avert a cash crunch heading into the country’s biggest holiday of the year.

Earlier this week, short-term funding costs had spiked to their highest levels in nearly 10 years on fears that liquidity was sharply tightening, sparking a jump in the yuan currency.

No one-off devaluation for yuan: Expert

No one-off devaluation for yuan: Expert  Wednesday, 11 Jan 2017 | 8:39 PM ET | 01:33

But China watchers polled by Reuters had not expected a cut in RRR until the third quarter of 2017, as such a move would put more pressure on the ailing yuan.

Key funding and money market rates had shown signs of easing on Friday after the PBOC’s massive injections, but remained well above normal levels.

‘A strange move’

“Today’s move seems to suggest that liquidity conditions are tighter than authorities’ expectations, as capital outflows remain strong,” said Zhou Hau, senior emerging markets economist at Commerzbank in Singapore.

“But in the meantime, an outright easing will add pressure on the yuan exchange rate as well. That could be the reason behind today’s strange move.”

The central bank will restore the RRR for the five banks to the normal level at an appropriate time after the holiday, according to the sources.

“This is a temporary adjustment, and is mainly in response to the cash withdrawal, tax payment and reserve payment. (The RRR) will go back to the normal rate after the Lunar New Year holiday,” one source said.

Renminbi to depreciate: Expert

Renminbi to depreciate: Expert  Monday, 9 Jan 2017 | 12:00 AM ET | 01:06

The PBOC said later on Friday that it will provide temporary liquidity support for several major commercial banks for 28 days to ensure adequate liquidity ahead of the Lunar New Year, according to a notice posted on its official microblog.

The funding cost for the liquidity support will be about the same as the open market operations rate over the same period, the PBOC said, without specifying any requirement for collateral.

Annual tightness

Liquidity always tightens in China ahead of the Lunar New Year holiday, which this year starts on Jan. 27 and ends on Feb. 2, as households and companies usually withdraw huge amounts of cash from banks.

The central bank typically responds by injecting ample funds into the market, but some traders say its injections this year have barely been keeping up with heavier demand.

This year, the holiday also extends over the month-end, when corporate cash demand increases and some tax payments are due, adding to the strain.



Italy’s fifth-largest bank UBI Banca said on Thursday it would launch a share issue for up to 400 million euros (347.17 million pounds) to strengthen its capital after offering to take over three small rescued banks.

UBI approved a binding offer worth 1 euro to buy Banca Marche, Banca Etruria and CariChieti, which Italy rescued from bankruptcy in November 2015 and struggled to find a buyer for in the course of last year.

Private equity bids were rejected over the summer as too low and an acquisition by UBI took longer than expected partly due to a number of conditions set by the lender.

UBI said its offer was subordinated to the fact that Italy’s resolution fund inject 450 million euro in capital into the three banks before the closing of the sale.

The banks must also offload 2.2 billion euros in problem loans before then


New Italy PM Gentiloni says ready to intervene to support banks

Italy’s new prime minister, Paolo Gentiloni, said on Tuesday that his government would be ready to take action to support the country’s troubled banking sector.

Paolo Gentiloni Sworn In As Italian Prime Minister

Camilla Morandi – Corbis | Corbis Entertainment | Getty Images
Paolo Gentiloni Sworn In As Italian Prime Minister

“I want to say very clearly that the government … is ready to intervene in order to guarantee the stability of banks and the savings of our citizens,” he told the Chamber of Deputies in his first address as prime minister.

Monte dei Paschi di Siena, Italy’s third-biggest lender, is pressing ahead with a last-ditch attempt to raise 5 billion euros of fresh cash it needs from the market to stay afloat.

However a Treasury source said on Monday the state was ready to pump capital into the bank, one of several Italian lenders suffering from bad loans.


Italy’s pain has turned into even more gains for US banks

For how tumultuous of a year it’s been for business and politics, it’s somehow fitting that 2016 should end with Americans banks sitting pretty as an oasis of stability.

After an explosive move higher during November, U.S. banks got another boost Monday from the “no” vote in the weekend’s Italian referendum. One of the net effects of the vote was that a bank bailout for the nation’s big institutions looks less likely, as populist sentiment continues to grow.

Another is a further reminder that a U.S. banking sector that for years held pariah standing is suddenly a darling.

“Clearly, this is good for U.S. banks,” said Chris Whalen, who covers financials as senior managing director and head of research at Kroll Bond Rating Agency. “If you’re a global investor, you want exposure to financials. You’re not going to be going into Europe. There’s no reason to own those names until we get clarity of what they’re going to do.”

Italian banks face an especially thorny issue in trying to rebuild market confidence.

Demonstrators hold banners and shout as they protest against Italy's Prime Minister Renzi outside Chigi Palace in Rome, Italy, on Monday, Dec. 5, 2016.

Alessia Pierdomenico | Bloomberg | Getty Images
Demonstrators hold banners and shout as they protest against Italy’s Prime Minister Renzi outside Chigi Palace in Rome, Italy, on Monday, Dec. 5, 2016.

The primary problem is with nonperforming loans — or those which have gone delinquent for 90 or more days. Italian banks have about 356 billion euros ($377 billion) on their books and not nearly enough capital to cover them.

Had Italians voted “yes” on the referendum, it would have concentrated more power in Rome and given the government more leeway to help the banks. As it stands, the “no” vote leaves a complicated legislative structure in place that makes it difficult for the country to pass laws.

In practical terms, that means banks are going to have to go out and raise capital to cover their nonperforming loans, something that could be difficult considering the shape of their balance sheets. European regulators have looked to avoid situations where individual banks were singled out as winners or losers.

Investors dumped Italian banks in Monday trading, sending Banca Monte dei Paschi di Siena down about 4.5 percent Monday. The bank’s shares have plunged more than 86 percent over the past 12 months as the institution looks for a workable way to deal with its bad loans.

U.S. banks’ shares, meanwhile, rallied from the open, with the KBW Nasdaq Bank Index rising about 1.3 percent in morning trade. The index is up more than 22 percent year to date, owing significantly to a post-election surge on belief that President-elect Donald Trump’s policies will generate greater growth, higher interest rates and a lower regulatory environment than has been in place over the post-financial crisis years.

Another round of turmoil in Europe — so-called contagion that spreads from Italy to other parts of the Continent — could make U.S. banks even more appealing.

“What we’ve seen with all of these European banking crises is that the United States banks have been able to take market share,” said Dick Bove, vice president of equity research at Rafferty Capital Markets. “Given the fact that there is general consensus everywhere else that the U.S. banks are well-capitalized with excess liquidity, they take market share.”

Indeed, the domestic bank rebound has made the sector matter again after years of poor performance following the global financial crisis in 2008. Financials now have a market cap of $2.8 trillion, or 14.8 percent of the cap-weighted S&P 500, where it now ranks as the second largest of 11 sectors. Yet financials are trading at just 14 times earnings, the second-lowest multiple on the index.

Still, there are some concerns that the rally may be ahead of itself.

Some of the factors investors believe will help banks, particularly higher rates and widening spreads, won’t be felt immediately, Whalen said.

“Will Trump and higher rates and deregulation help banks? Yes, no question,” he said. “But that’s a medium-term proposition, that’s not this quarter.”

Fed’s Kashkari unveils plan to tackle ‘too big to fail’ banks and funds

Minneapolis Federal Reserve President Neel Kashkari unveiled a plan on Wednesday to prevent future government bailouts by forcing the largest U.S. banks to hold so much capital that they would probably decide to break themselves up.

Kashkari’s plan would also penalize large asset managers, with the idea that so-called “shadow banks” can create systemic risks similar to that of big banks.

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“We expect that institutions whose size doesn’t meaningfully benefit their customers will be forced to break themselves up,” the Minneapolis Fed said in a summary of its plan.

The plan, which would double the amount of loss-absorbing equity capital for large U.S. banks and impose a new tax on hedge funds and other asset managers, is sure to face fierce opposition from Wall Street.

It may also be a tough sell for policymakers who have already imposed rules intended to eliminate the notion that some banks are “too big to fail,” or TBTF.

However, its prospects may be better under the administration of President-elect Donald Trump and the new Congress.

Trump has been critical of Wall Street, and indicated he would support dismantling 2010 financial crisis legislation known as Dodd-Frank, but it is not clear whether he would support Kashkari’s approach.

However, lawmakers such as Texas Rep. Jeb Hensarling, who runs the House Financial Services Committee, have also argued for ratcheting up capital requirements to a level that would prompt big banks to split apart. Senate Banking Committee members Sherrod Brown, a Democrat, and David Vitter, a Republican, have also introduced legislation seeking to raise capital requirements.

“I believe the biggest banks are still TBTF and continue to pose a significant, ongoing risk to our economy,” Kashkari said in planned remarks he was to deliver at the Economic Club of New York on Wednesday.

Kashkari has made “too big to fail” his signature issue since being appointed head of the Minneapolis Fed in January. He has held symposiums on the topic to get views from policymakers, academics and industry leaders about the best way to prevent future bailouts.

A former Goldman Sachs banker who administered the U.S. Treasury Department’s bailout program during the financial crisis that erupted in 2008, Kashkari has positioned himself as a reformed Wall Street banker who knows best how to fix the problem. He also ran for governor in California in 2014, but has declined to comment on future political ambitions.

Kashkari’s initial comments about breaking up big banks earlier this year drew praise from then-presidential candidate Bernie Sanders, a senator from Vermont.

Dodd-Frank advocates have argued that it will prevent future bank bailouts. But the Minneapolis Fed proposal argues there is still a 67 percent chance of one over the next 100 years. Kashkari’s plan would reduce the likelihood of a future financial crisis over the next 100 years to roughly 9 percent, according to the proposal.

The increased equity requirement for banks would replace an existing requirement that allows banks to use equity and long-term debt.

The plan would also require the Treasury Secretary to certify that the banks subject to the rule are not “systemically important.” Otherwise, they would face even tougher capital requirements.

Banks subject to the rule will have $250 billion in assets, a group that would include Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup, among others. A group of so-called “shadow banks,” with more than $50 billion in assets, like Blackrock Inc would face a tax of at least 1.2 percent on their debt. If the Treasury indicates any of those firms are systemically important, the tax would rise to 2.2 percent.

“The tax would effectively make the cost of funds roughly equivalent between large banks and nonbanks,” according to the plan, which was released Wednesday.

Banks with less than $10 billion in assets would see looser regulations, since they do not pose a threat to the U.S. economy, Kashkari said. Insurers would also escape the rule, because their funding model is different.


Deutsche Bank’s sale of stake in Hua Xia gets watchdog’s nod

Pedestrians pass a branch of Deutsche Bank in Berlin, Germany.

Krisztian Bocsi | Bloomberg | Getty Images
Pedestrians pass a branch of Deutsche Bank in Berlin, Germany.

Deutsche Bank’s sale of a 20 percent stake in Chinese peer Hua Xia to PICC Property and Casualty has received regulatory approval, Germany’s flagship lender said on Thursday.

Hopes to expand into the Chinese banking market never materialized for Deutsche Bank as for several other Western lenders. Bank of America reacted in 2013 by divesting a shareholding in China Construction Bank, while Citigroup sold its stake in Chinese lender Guangfa earlier this year.

Deutsche Bank, which faces large legal costs for cleaning up past missteps as well as for reinventing itself in a changed market and regulatory environment decided the sale of the Hua Xia stake, in which Deutsche Bank invested in 2006, in December 2015.

But it took Hua Xia longer than expected to obtain clearance for the deal from the China Banking Regulatory Commission, weighing on the price of the sale.

While Deutsche Bank had said last year that it was selling the stake for 23 to 25.7 billion yuan or 3.2 to 3.7 billion euros ($3.6-4.1 billion), a move in exchange rates means that the price has come down to 3 to 3.5 billion euros.

At the beginning of 2015, the stake’s market value stood at 4 billion euros, but it plunged in a global selloff of Chinese equities

Deutsche Bank wrote down the value of the stake to 2.8 billion euros in its books as of Sept. 30, among other due to dividend payments receives from Hua Xia.

New bank rules make it disadvantageous for banks to hold minority stakes in other lenders.

The Hua Xia divestment frees up capital and boosts Deutsche Bank’s capital ratio by 50 basis points to 11.6 percent. The effect of the sale had already been taken into account in the European Central Bank’s stress test of Europe’s banks in summer.