Bonds, Currencies & Commodities
Corporate bond yields slump on surplus liquidity

Falling yields on government bonds are being mirrored by the corporate bond segment, as sluggish credit growth and low interest rates lead to oversupply of money

The Reserve Bank of India (RBI) has shied away from hiking interest rates, largely because credit growth has failed to match up to its expectations. During November, the resulting surplus cash lying with the banking system has contributed to the decline in corporate bond yields which have slumped by 30-50 basis points to their lowest in nearly 3.5 months. The yield on the Reuters benchmark five-year corporate bond ended at 8.07% on Friday, the lowest since 30th July.

RVS Sridhar, senior vice president for treasury at Axis Bank explained, “Bond yields are falling as a result of the relief rally, post the RBI's monetary policy review, as no rate hikes have been carried out. The hike in statutory liquidity reserve (SLR) led to a bullish rally on potential increase in demand which has fed into the bond segment too. Availability of sufficient liquidity amid lack of credit growth has led to a rally and credit spreads have shrunk.”
 
“Indian banks are waiting for disbursement to happen but actual disbursement is not picking up. RBI has not tightened the money supply and has not increased the rate to ensure good economic growth; all these factors resulted in excess liquidity in the market,” said Gautam Jain, senior analyst, RBS Equities.
 
“When current interest rate is lower than coupon rate of corporate bonds, the value of bond goes up more than the face value (as there would be more demand for higher coupon rate bond) and when the bond value is more than the face value, yield goes down as the holder of a corporate bond will be getting same coupon rate of interest on higher value of bond,” Mr Jain added.
 
According to RBI data, total bank credit since January increased a mere 9.8% over the corresponding period last year. In comparison, credit off-take registered a robust 27.7% growth during the same period last year. This has caused RBI to revise its credit growth target to 18% from 20% earlier this year.
 
Speaking on future movements in bond yields, Mr Sridhar said, “In the short term I believe the rally would be sustained until we see any concerns from RBI or inflation concerns. The rally may end in December as markets prepare for the January monetary policy review.”

Mr Jain opined, “I think, till December 2009 end, it is likely to remain at this level and from January 2010 onwards, it should move up. RBI may increase the interest rate to tackle inflation in their 10th January policy meet. There would be a pick-up in credit growth as normally credit grows well in the last quarter. Hence, I think from January-February onwards the bond yield should start moving up marginally.” – Sanket Dhanorkar [email protected]

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‘Real estate prices are bound to come down from November’

Pankaj Kapoor is the founder of Liases Foras, a real estate research firm. He tells Moneylife that property prices are bound to fall because they have again become unaffordable

ML: What is your view on the increasing prices of residential properties? Do you feel that market sentiments have improved?
PK:
From November onwards you will again see a drop in price of properties by 15%-20% as the developers have lot of inventories and on top of that they are increasing the prices, encouraged by a more buoyant market.

ML: How much of residential inventories are piled up across six cities (Mumbai, NCR Delhi, Bengaluru, Pune, Chennai and Hyderabad) in India? Do you think they will increase in Q2 FY10?
PK:
In the last quarter (Q1 FY10) unsold inventories in six cities (Mumbai, NCR Delhi, Bengaluru, Pune, Chennai and Hyderabad) were about 282,999 units or 34 crore sq ft. This includes as many as 68,000 units unsold in Mumbai; 70,000 in National Capital Region of Delhi (NCR); 48,000 in Bengaluru; 44,000 in Pune; 21,000 in Chennai and 32,000 in Hyderabad. I think the figures will increase by approximately 20% in Q2 FY10. Till the time the developers do not bring down the prices, properties are not going to sell.

ML: Why are the developers raising prices if so much of inventories are still left with them?
PK:
Real estate developers are ramping up the property prices in order to get higher valuation as many of them have planned an initial public offering (IPO). It is all part of a gameplan. During the slowdown from October 2008 all developers had gradually reduced their property prices by 30%. This revived the sector a bit. Initially builders hiked prices by 5%-10% just to signal the bottom and get potential buyers to stop waiting for a further decline. As the builders saw demand coming in the market, they hiked up the prices once again for higher valuation and they have killed the market.

ML: During Dushera to Diwali most developers launch new projects. How many were being launched across six cities by the developers during the last festive season?
PK:
In Pune, around 200 new projects have been further launched between June 2009-September 2009. We are foreseeing the same kind of situation across the six cities.

ML: What was the price at which properties got sold and what are the prices at which the left over properties are available for sale in Mumbai?
PK:
In Mumbai, properties beyond Borivali, were selling at Rs 2,000 per sq ft. The left over properties were priced at Rs 2,800 per sqft. In central Mumbai properties sold at the bottom at Rs 13,475 per sq ft and but the left over properties are now priced at Rs 24,950 per sq ft.

ML: Do you think the developers will reduce the prices of the properties?
PK:
Yes. There is still a huge gap between affordability and availability. Before the balloon could have burst it is blown again. It has happened in China, Japan and even in India.

ML: Are the developers trying to short change buyers by adding too much of a load to the carpet area?
PK:
Developers are offering properties on a super built-up area basis which is beyond 50% added to the carpet area. Builders have inflated figures for super built-up area. None of the builders are ready to sell on a carpet area basis. If a developer offers you 1,600 sq ft area then 800 sq ft is the actual area of the flat and the rest are the common amenities. In 2000, the super built-up area used to range between 18%-20% above the carpet area. Then in 2004 it was 35%; in 2005 it went up to 40%; in 2006 it went up again to 45% and after 2008 it is beyond 50%. It should be made mandatory to sell by the carpet area rate basis and strict laws are required to stop this. Government and banks are now coming together and are planning to make this rule (selling on carpet area basis) compulsory for all developers.
— Pallabika Ganguly [email protected]

 

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COMMENTS

Sharad Gaud

3 years ago

If the Builders will sell at carpet area and since the loading today is at 50 % then the prices will escalate and they will try to adjust the rate at carpet area so any ways the builders will make money and the situation will be same...

vinod

7 years ago

i am planning to buy plot near hinjewadi in pune will be good investment to buy now or shall i wait

K c Sarma

7 years ago

you predicted fall of 10-15% from nov-2009 but today in march 2010 proerty in mumbai increased to 30-40% +
Now the ground is prepared for bubble burst.

s.b jain

7 years ago

Under NGO pressure, The Govt. of Maharashtra has issued an ordinance for all real estate prices to be only quoted only on carpet area. But so far it has not been gazetted / notified due to the Builder lobby's payoffs. NGO's must immediately demand that this be gazetted / notified.
I compliment Mr Kapoor for his forthrightness.
Property is a derived demand and prices have to ultimately relate to the general net income & wage level in the market. Artificially low Interest rates & abnormal liquidity are what screw up the market for real demand as consumers are easily lured into overleveraging themselves which sets up its own consequences. In my view prices need to fall at least 50 % if not more for a stable long term equilibrium!!!

“The new generation of wealthy are the ones open to using wealth-management services”

Yogesh Sapkale (MLD): Tell us about the wealth management services of BNP Paribas.Sharad Sharma (SS): Wealth management services in India started in 2001 and BNP Paribas was amongst the first to start. Since then we have been very consistently trying to emphasise more on the quality build-up rather than volumes. Our attrition rates for clients are very low. Acquiring client details is a long process and we would like our clients to stick to us for a much longer period. As of today, we have relations with around 1,000 family groups. Actual account numbers can be much more because one family can have 4 or 5 accounts. What is unique about our client relations is we give them a solution which is holistic rather than sticking to what the license permits.

MLD: What are your core target segments?
SS: Our target market comprises business families, entrepreneurs, professionals and senior management professionals. The segment of smaller entrepreneurs is where we see the maximum possibility for our value-added services. That's the most preferred client segment. And we know that tremendous growth is expected in the years to come. This also means more and more individuals are seeking specialised advice in managing their growing wealth.

MLD: In India, the number of wealthy fell by nearly a third to 84,000 in 2008, the fastest drop in the world after Hong Kong. During the recent turmoil, many of the players in the wealth management business have lost clients. What is the situation right now?
SS: Last year, a lot of clients were moving out from risk assets to risk-free kind of assets. There is certainly a marked change in the situation today than it was a year ago. The rise in the markets has been swift so far. The sentiment has changed and investment appetite is gradually reviving, driven by the performance of asset classes. We feel that there is never is a perfect time to enter the market.

Investment in equity has to be over a three-five year horizon. I must add, we were barely impacted by any loss in clients. There was a large segment among the wealthy which was not using wealth management services. They are using advisory services now rather than doing it on a standalone basis or picking and choosing each service provider for only the transactions they wanted to do.

MLD: How much current client assets under management BNP Paribas has at present and where you see BNP Paribas in the next 12 months?
SS:
Client assets in all organisations are a mix of things and so an apple to apple comparison is not possible. But I can say our growth has been fast. I see growth in terms of adding more and more families. On the asset side, the growth based on the acquisition will keep on increasing as well as on the wallet size of existing clients.

MLD: Many of the millionaires in India are first-generation, mostly created by the stock market boom between 2003 and 2007. How does BNP Paribas deal with their expectations?
SS:
In fact, the new generation of wealthy are the ones open to using professional services. The reason is they have grown using the most modern facilities and practices available in their own industry and the same attitude applies for handling their wealth. They are very receptive to new ideas.

MLD: Financial institutions have divided wealth management services market into four segments based on income levels. Is that logical?
SS:
The requirements, perceptions, risk appetite will be different for different segments. Segmentation helps in aligning the advice, products, services and delivery channels to their specific needs.

MLD: Do you have specific criteria for selecting new clients?
SS:
The starting point is $1 million plus investment. That is a good starting point and we build on that.

MLD: Most local wealth management service providers accuse global players with some concerns in the longevity and stability and their commitment to India. Your comments…
SS:
Well, all I can say is that BNP Paribas will shortly be completing 150 years in India, in some form or the other, so we have been around for a while now.

MLD: Going forward, the competition in the wealth management segment is bound to increase. How you plan to tackle it?
SS:
We welcome competition because as more and more organised players come, the market practices will improve and ultimately it will be the resident Indians, who will have better services. We were early entrants, so we already have gone through the learning curve much earlier. We also bring in the best practices and more experience.

MLD: If I have to differentiate between BNP Paribas Wealth Management and others, what would be your USP?
SS:
The biggest factor is we are not transaction oriented. We are more focussed on long term relationship oriented approach.

MLD: What about marketing practices?
SS:
Our marketing is based on a simple principle: understand the client's total requirement. We are not going to go with a single product but rather with a holistic approach. We find solutions for clients and not really sell products. That's how we probably build.

MLD: What about growth through consolidation, mergers and acquisitions?
SS:
I think it is too premature for consolidation in wealth management segment because as of now the penetration levels are quite low. I think consolidation is a few years away.
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