Thursday, May 19, 2022
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20% jump in default hedge costs for banks

MUMBAI: In the last two weeks, a 20% jump has been recorded in the insurance cost of hedging against a possible default for Indian banks. Many states have recorded this cost increase due to partial lockdown and restrictions.

Credit default swaps (CDS) with default insurance linked to ICICI Bank and State Bank of India have reached the level of the first wave of corona virus. The impact of CDS rate can affect the earnings estimates of private banks.




Ganesan Murugayan, head of investment banking at BNP Paribas, said, “The risk premium of Indian banks has increased in this volatility. The impact of the second wave of Corona virus has surprised many foreign investors. Investors are watching its impact closely.” . ”

According to Bloomberg, ICICI Bank’s one-year CDS deals reached 47.42 on Monday, up from 28.35 on 12 April. CDS data is not updated daily. In this way, the CDS has risen by 1,907 basis points in two weeks.

However, there has been a weakness in the US bond yield during this period. This means that the risk perception of both lenders has increased tremendously. A foreign investor will have to pay 47.42 cents for every $ 100 deposited in ICICI Bank. In the event of default, the losses will be repaid from here only.

During this period, shares of ICICI Bank jumped up to 10 per cent on BSE. The bank has recorded an improvement in asset quality in the March quarter. On Monday, State Bank of India’s one-year CDS deal price reached 36.31, which is 789 basis points higher than 28.42 on April 12.

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