ICICI Bank Ltd, India’s largest private sector lender, has seen its market value shrink by about 34% since its stock reached an all-time high of Rs1,465 in mid-January, even as the country’s benchmark stock index, the Sensex has fallen about 21% during the period.
One of the recent reasons behind investors fleeing ICICI shares has been the impact of its exposure to credit derivatives. The bank has so far reported around $264 million (Rs1,064 crore) mark-to-market losses on account of its exposure to credit derivatives as well as an erosion in value of investments made by its subsidiaries in the UK and Canada. The losses are likely to climb.
In an exclusive interview with Mint a day after confirming the derivatives-linked loss, ICICI’s joint managing director and CFO Chanda Kochhar disclosed that ICICI has stopped taking further exposure to such assets even as she dissected the losses and defended the bank’s exposure to such derivatives. While such investment decisions are taken by a committee of directors, Kochhar says that as CFO, and someone who manages ICICI’s risk, the buck stops with her. Edited excerpts:
When did you get to know of this loss?
We always knew our derivatives portfolio and so there is no discovery as such. Every quarter, we need to see the portfolio and follow the accounting practice of mark-to-market that values investments according to the prevailing market prices and at the price at which they are made. Until August, there was no real widening of spread and so, there was no erosion in the market value of the portfolio. In the September quarter, the spreads widened and we first booked losses.
We are aware of our portfolio and every quarter we need to follow the accounting practice of marking to market. It will all depend on the spread...
In mid-January, you had mentioned that the bank had made provisions for Rs120 crore in the quarter ending September and another Rs150 crore in the December quarter. That’s about $65 million. Now you are talking about $264 million. How did this rise so fast?
Dissecting losses: Chanda Kochhar, ICICI Bank joint MD and CFO. (Bloomberg)
It’s not correct to say that losses worth $65 million has now risen to $264, which is a combination of many things. Let me start with $65 million first. Actually, we had provided $69 million in September and December quarters for ICICI Bank’s exposure to credit derivatives. Over and above that, we had also provided another $20 million in these two quarters in our subsidiaries. So, we have already provided $89 million.
Now, when we estimated the extent of widening of spreads in January, we found that we would require another $80 million worth of provision to take care of mark-to-market losses. This is an estimate and the figure will actually get crystallized on 31 March.