Markets are down 1.5% in a sudden move after Moody’s downgraded SBI, India’s largest bank. The Rating goes to D+ from C-.

"Moody's Investors Service has downgraded the State Bank of India's (SBI) bank financial strength rating (BFSR), or stand-alone rating, to D+ from C-. The revised rating maps to a baseline credit assessment (BCA) of Baa3. As a result of the lower BCA, the Hybrid debt rating was downgraded to Ba3(hyb) from Ba2(hyb)," a statement from the ratings agency said.

The stock is down 5% on reasonable volumes, at 1765.

Also see: "SBI Will Sell Bonds at 9.95%"

How do you work this sheet?

Interest Payment: The coupon rate that is paid out every year. It's on the face value of Rs. 10,000 - so 9.75% means Rs. 975 per bond per year, regardless of the current market price of the bond.

Redemption Date: If everything works out and SBI doesn't go bankrupt or something, you will get Rs. 10,000 (the face value) back on this date.

Current Price: What the bond is currently trading at in the market.

Call Option: SBI retains the right to, after a while, call back the banks and tell you, "Listen, here's your Rs. 10,000 per bond and Rs. X as accrued interest. We redeem these bonds". For some bonds the "call option" is after 5 years, for others its after 10.

Embedded Interest: SBI bonds pay out interest once a year (record date is usually 17th of March every year) So as the days go by, the interest gets added up - the Rs. 975 per year in the above example is about Rs. 3 per day. The subsequent calculation of the yield needs to remove the accrued interest, which is part of the price. (This is also why you will see the price DROP by Rs. 975 or so every March 16 for that bond).

(Thanks to @lukkha for pointing me to this article that confirms we have to reduce the accrued interest)

Yield: I've split this into two parts.

SBI Takes Call: Means that on the call date, SBI returns you the money. They will only do this if the market rate of interest is less than the coupon rate - I'd assume they will exercise the call option only if rates go below 9% for them. What you see in this row is the return if SBI decides to exit early.

SBI doesn't: Let's say interest rates are higher than 9-10% and SBI decides to carry on. You get a longer period of holding, so your yield changes.

Yield is simply what you make as a return, expressed in a way that is understandable as a compound interest return over time.

Cut out the bullshit

If you're thinking - dude, get to the point, did I make money or not? Well, if you bought in the IPO you probably got about Rs. 50 per bond as interest till now. You'll get another 15 days of interest after April 2, which is another Rs. 42. (even if you sell the bond today) That's interest of about Rs. 90.

Look at the prices: Three bonds are quoting at a loss (less than 10,000). There, you've lost money, but if you include the interest you are still okay.

But then, if you consider that you could have put the money in the bank, which could have gotten you some interest, and adjust for that, you might still have lost money. But since this is "cut out the bullshit" mode, I won't go into that.

The N5 bond - the 9.95% retail bond - appears to be doing the best, in terms of yield it's actually the N4 bond that's done well. The best buy remains the N3 bond.

Remember, they're all SBI, and the difference between 10 years and 15 years to most people is "way too far away to bother". So the rates should be fairly close by - to give you an equivalent example, the 10 year Indian bond (okay, 11 year) is trading around 8.08% while the 15 year bond is at 8.34% - the difference is a narrow 0.26%.

Will I buy this? Er...no. I'm getting fairly good returns, post tax, through debt mutual funds for my debt exposure. All interest is fully taxable, which post tax is a return of 7% or less; I get a far better deal on short term debt funds which are giving me around 8% post tax (if I hold). The risk remains that interest rates will fall - but honestly, I don't expect that to happen.

Also see: A 9 minute Video on the Concept of Bond Yields, as a MarketVision Short Take, recorded by me.

This post is written by Deepak Shenoy, at Capital Mind.

Size: Upto 10,000 crores from retail, but official issue size is 2,000 crores.
Listed: Yes, on the NSE/BSE.
Interest rates:

9.95% for retail on the 15 year bonds, and 9.75% for retail on the 10 years.

Call Option: SBI has the right to buy back the bonds and pay you back the face value of the bonds. The call option is after five years for the 10 year bonds and, after ten for the 15 year bonds.

Tax Deducted at Source: Yes, before annual interest payments.

NRIs, Overseas Corporates, PIOs: Cannot apply.

What about tax: Tax is payable on the interest in full - i.e. the interest gets added to your income. That will pull the net yield down. You can choose to buy and sell on the exchange between interest payments, but the profit is added to your income (as short term capital gain).

What do I think?

This is a great issue for someone looking for a locked fixed income instrument for a long time. Given that fixed deposits are now yielding 10% you may want to think twice, but the 15 year lock-in is fantastic. Sure, they have a call option, but that will only impact the market value of the bond in later years, if interest rates are lower. (Different discussion)

But the cynical me is thinking - why is SBI doing this? They don't need to. They're really smart people. Let me reiterate that. SBI has extremely smart people. If they could have offered a lower rate, they would have. That means this is actually a low rate compared to what they expect rates to go to. Meaning, there will be more rate hikes, and the 9.95% that looks good now, won't look so great if you can get, say, 12% outside. (Don't tell me 12% is out of reach, please. Even 10% was out of reach a couple of years ago) So that's the risk - the feeling of regret if rates go up to 12% - in fact, you will think of it as a "loss" because the market value of the bonds will be below par, in that case. But if you have a different view on interest rates or can swallow such regret, go ahead.

The full prospectus and application forms etc. will be available shortly. More info then.

This post is written by Deepak Shenoy, at Capital Mind.

But the results are surprisingly bad. Consolidated revenues were at 32,231 crores (up 6%) but profit after tax was at 3305 cr. (down 8.3%). EPS was Rs. 52.05, taking the first nine month EPS to 144. The problems: Higher NPAs and 3x higher provisioning/low coverage. NPAs went up to 18,861 crore (gross) and 11,270 cr. (net) both near double digit increases.

SBI is a wait and watch stock, and while I wouldn’t go long yet, the current price of 2091 talks a p/e of 11 on an EPS of nearly 190 .  That’s not bad considering the overall high price of ICICI and HDFC Bank (both above 20).

This post is written by Deepak Shenoy, at Capital Mind.