The ripples of subprime have touched Indian high-street banks. ICICI,
the country’s second-largest bank, has announced a mark-to-market hit
of $263 million in its loan and investment exposures. The country’s
biggest bank, State Bank of India, and other state-owned players with
overseas offices such as Bank of India and Bank of Baroda (BoB) will
also have to step up provisionings on their investments in securities,
which have been hammered by the credit crunch.
While the PSU banks refused to disclose their positions, according to
market circles, their combined exposure would be in the region of $1.5
billion, which could translate into a mark-to-market loss of over $200
million. ICICI Bank and its overseas banking subsidiaries have an
aggregate exposure of $2.2 billion in credit derivatives, of which
around $500 million is in the books of overseas subsidiaries.
How will it affect profitability? Till the markets are in turmoil,
banks will have to make provisions on such exposures. For the March 31
quarter, ICICI Bank will have to make an additional provision of around
$74 million, after having already provided $189 million in the previous
quarters. The provisioning accounts for the bank and its subsidiaries’
investments in derivatives such as credit-linked notes (CLN) and credit
default swaps (CDS) as well as fixed-income instruments like bonds.
According to ICICI Bank joint MD Chanda Kochhar, there has been no
decision to sell down these loans. “These are only mark-to-market
losses. As the money comes back, the losses will get recouped over a
four-year period,” she said.
In a release to the stock exchanges, ICICI said it has no material
direct or indirect exposure to US subprime credit. The widening of
credit spreads in the international markets has resulted in a negative
mark-to-market impact on 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. Ms Kochhar added that the bank has not made
any new investments overseas in the past six months.
The picture is far from clear for PSU banks, though their exposure is
significantly smaller. BoI has an exposure of around Rs 1,200 crore in
CLNs. While these are tradable instruments, the price suffers with poor
liquidity. According to a bank official, “We do not foresee significant
losses due to CLNs; nor do we see a big change in valuations before the
end of the quarter, when they will be marked to market.” The bank might
raise its provisioning by another Rs 4 crore over the present
provisioning of about Rs 4 crore.
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