Tokyo / Hong Kong: The cost of default protection on ICICI Bank Ltd, the Indian lender that has reported the biggest losses on overseas investments, rose to a record on Friday as the shares fell the most since 1997, with the lender’s assurances that its finances were sound, doing nothing to calm investors. Five-year credit default swap (CDS) contracts on the Mumbai-based bank’s debt were quoted 130 basis points higher at 900, Barclays Capital prices show. One basis point is one-hundredth of a percentage point. The previous record of 860 was set on 8 October, according to CMA Datavision prices tracking the contracts back to 2004.
CDSs, financial instruments based on bonds or loans, were conceived to protect bondholders by paying the buyer face value in exchange for the underlying securities, or cash equivalent, should the borrower default.
At 900 basis points, ICICI swaps, which rise as perceptions of credit quality deteriorate, are equivalent to $900,000 (Rs4.38 crore) annually to protect a $10 million investment in the bank’s notes.
“I don’t see why anyone would want to take ICICI risk,” said Eugene Kim, chief investment officer of Tribridge Investment Partners Ltd, a Hong Kong-based hedge fund managing $200 million. “There are a lot of ICICI bonds in the market which fund managers can’t sell, so the only way they can do it is to buy its CDS. But then no one wants to sell the protection, so the price keeps on going higher and higher.”
ICICI, the worst performer among financial stocks in Asia on Friday, has slumped 47% from the beginning of September as the global credit crisis triggered the collapse or seizure of US and European banks. The Reserve Bank of India and finance ministerP. Chidambaram last week issued statements reassuring investors that India’s second largest lender has enough capital.
“The bank has sufficient liquidity,” ICICI joint managing director Chanda Kochhar told reporters in Mumbai on Friday. The lender, which has about Rs12,000 crore in its international operations, doesn’t finance its overseas business with domestic funds, she said.
ICICI has $150 million in loans tied to Indonesia’s Bumi Group, Kochhar told CNBC-TV18. The bank holds cash of about $45 million against loans to Bumi, she said. “These are small exposures given our size and our profitability,” Kochhar said. ICICI’s capital adequacy ratio was 13.4% as of 30 June, more than the minimum 9% required by regulators, chief executive officer K.V. Kamath had said on 30 September.
The bank’s stock plunged 19.71% on Friday to close at Rs364.10. The stock had extended its drop to as much as 28% in intra-day trading.
Since the beginning of the year, the ICICI stock has lost 70.46% while the benchmark index, the Sensex, has lost 48.1% and the Bombay Stock Exchange’s banking industry index, the Bankex, lost 53.41%.
Since the beginning of 2008, ICICI Bank’s market capitalization has been eroded by Rs96,597.50 crore to Rs40,511.95 crore. “There is pure selling pressure. Sentiment is weak. Even if you discount the risks in its overseas operations, the stock fall is high,” said Vaibhav Agarwal, an analyst at Angel Broking.
A large Indian bank borrowed Rs1,000 crore from another bank at an interest rate of more than 20% this week, the highest rate charged for a 45-day loan between Indian banks since the mid-1990s, Mint reported on Friday. The paper didn’t name the banks because that was a condition for confirming the details.
The story doesn’t refer to ICICI, which, therefore, doesn’t need to comment, spokesman Charudatta Deshpande told Bloomberg.
ICICI Bank may have to set aside an additional $28 million for potential losses on the €57 million (Rs376 crore today) in Lehman Brothers Holdings Inc. debt held by its UK unit, according to a 16 September statement from the lender.
The bank recorded $100 million in mark-to-market losses for the fourth quarter ended 31 March on overseas investments.
For the fiscal year, the writedowns totalled $170 million. Broker Edelweiss Capital said it expected ICICI Bank to post $200 million in losses on bonds, including Lehman debt.
A finance ministry official said on Friday Indian banks were well capitalized and the ministry did not see specific problem with ICICI.
“We don’t see any specific problem with ICICI Bank,” the official, who did not wish to be identified, told reporters.
Mint’s Ashwin Ramarathinam and Reuters contributed to this story.