Other figures that have been added to arrive at the final figure of $264 are some investments by ICICI Bank’s UK and Canada subsidiaries. They have their own asset liability management system and they need to keep some money in liquid assets. That portion is about $4 billion. We don’t understand the equity market well and so, we deploy funds in fixed-income securities and like any other securities, investment in those securities also need to follow the mark to market accounting principle. In December quarter, we provided in our subsidiaries books $100 million for this. There is nothing new in it.
So, there are four things that have contributed to the $264 million figure: $69 million credit derivatives losses that have already been provided for by the bank, $20 million provided for in the books or our subsidiaries for similar losses, an estimated $70 million for further erosion in value in January and $100 million for investments by our subsidiaries.
If your exposure is $2.2 billion and your mark-to-market losses are $264 million, your losses are around 12% of your portfolio. Can this rise?
Actually it’s $164 million and so, about 8% of our portfolio. It’s difficult for me to predict to what extent it can rise. Mark-to-market losses are not real loss. It’s a notional loss. What we can monitor is the credit quality of the underlying papers. Are the companies paying interest on time? Is there any deterioration in the credit quality of these companies? About 65% of the portfolio is blue-chip Indian firms and none of them are defaulting. We are monitoring the global companies on a daily basis and their rating continues to be investment grade. We will take immediate action if anything goes wrong. None of them has defaulted in their payment obligation so far and there is no worry on that front.
Our portfolio is good but, if the global spread widens we will have to book notional mark-to-market losses again. I cannot predict this.
Even if all the losses do not affect your profit and loss account, as you have said they can be adjusted in the balance sheet, it will affect your net worth. How will it impact your capital adequacy?
It definitely brings down the capital adequacy ratio. We have already adjusted $65 million with our reserves of our subsidiaries and despite that they are sufficiently capitalized. The post-tax impact is around $47 million.
Why did you hold these loans as investments, instead of loans?
Relevant proportions: Kochhar says ICICI Bank’s banking balance sheet is $103 billion and the credit derivatives portfolio is $2.2 billion. (Rajeev Dabral / Mint)
Out of our $25 billion international balance sheet, we hold only $2.2 billion in such assets and the rest of it are all loans. We hold these papers because direct loans to some Indian firms do not give us such a high return. For normal loans, you need to work on a very thin spread but these structured deals give us better spread. In a way, it is a sort of guarantee. A bank has already taken exposure to these companies and they want a sort of protection against any default. We know these companies well as we have already given them term loans or working capital loans in India. So, we are very comfortable (with them).
The global market does not understand the India risk as well as we do and therefore we have the arbitrage facility of making better margin on the same set of Indian firms than what we would have made by giving rupee loans.
What are the underlying securities on the collateralized debt obligations (CDOs) that ICICI bought?