Mumbai: The subprime crisis that has rocked the global financial world has not spared ICICI Bank Ltd with credit derivatives exposure costing India’s largest private sector lender at least $264.34 million (Rs1,065 crore).
“Following the subprime crisis overseas, ICICI Bank’s overseas operations had reported mark-to-market losses of $264.34 million on account of its exposure to credit derivatives and investments as on 31 January,” minister of state for finance P.K. Bansal told the Rajya Sabha, the Upper House of Indian Parliament, in a written reply on Tuesday.
The bank’s stock fell some 9% soon after the statement was made but recovered a bit to close down 5.16% at Rs971.60 on the Bombay Stock Exchange, even as the benchmark index Sensex fell 2.03%.
A collateralized debt obligation (CDO), or credit derivative, is a type of asset-backed security that has become popular over the past decade and the global CDO market is currently worth more than $2 trillion. A CDO is usually backed by pools of bonds and loans. A typical CDO is sliced into several tranches in accordance with the risk and maturity of the underlying assets. Investors holding the riskier slices get paid higher interest rates to compensate them for higher default risk.
Among Indian banks, ICICI Bank has the highest credit derivatives exposure, around $1.5 billion. Including its ove-rseas subsidiaries, the aggregate exposure to credit derivatives is around $2.2 billion. India’s largest lender State Bank of India has an exposure of about $1 billion. A few other public sector banks with overseas presence also have exposure to this segment.
According to Chanda Kochhar, joint managing director of ICICI Bank, the amount noted by the minister is a combination of various assets and not just credit derivatives.
“Out of $260 million, $160 million is on account of the bank’s exposure to credit derivatives products but, the rest, $100 million, is the mark-to-market losses that our subsidiaries in the UK and Canada need to book in their balance sheets on account of their investments that have been depreciated,” Kochhar, who is also in charge of ICICI Bank’s international operations, told Mint.
Marking to market is an accounting practice that values investments according to the prevailing market prices and not at the price at which they were made.
“The UK and Canada subsidiaries invested in securities and local markets and with the rise in interest rates, their valuation has gone down. We will make the adjustments in their balance sheets and this will not have any impact on the consolidated profit and loss account of the bank,” Kochhar said.
According to her, the bank has no direct exposure to sub-prime assets and there is “no credit loss”. The final maturity of bulk of the credit derivatives is around four to four-and-a-half years and the bank will “recoup” the losses when they mature, Kochhar said. “They are not defaulting in interest payments,” she added.
The bank has already booked about $90 million losses up to 31 December in its credit derivatives portfolio and plans to provide for an additional $70 million of losses in the fourth quarter of fiscal 2008, ending in March.
In a post-market closing clarification issued to stock exchanges, the bank said it has no material direct or indirect exposure to US subprime credit. “The widening of credit spreads in the international markets have resulted in a negative mark-to-market impact on the credit derivatives and fixed income investment portfolios of the bank and its overseas banking subsidiaries, while there has been no significant deterioration in actual credit quality of the underlying investments,” it said.
ICICI Bank sold gross non-performing assets amounting to Rs1,438.41 crore in 2005-06 to securitization and reconstruction companies and impaired housing loans of Rs381 crore during the quarter ended September 2007 to asset reconstruction company, Bansal said in Rajya Sabha.
As on 31 March 2007, the gross non-performing assets of ICICI Bank stood at Rs4,126 crore, the minister said.
“This is an extreme example of unfriendly shareholder policy” by a large organization, said Ketan Karani, head of equity research at brokerage Kotak Securities Ltd. “The bank could have disclosed in public their subprime exposure related losses much earlier. There should be greater transparency in a bank which is more than 70% owned by foreign institutional investors.”
PTI contributed to this story.