Bank bonds gain over merger plan

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.

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 Rs 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 per cent notes due April 2026 fell to 7.86 per cent on Thursday, compared with 7.9 per cent Aug. 30, according to data from Crisil. The yield on peer Union Bank of India’s 8.9 per cent notes due 2022 declined to 7.66 per cent versus 7.69 per cent, 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 in Mumbai.

“With these mergers, bank bonds are looking very attractive at this time given the yields they are offering compared to other issuers.”