ICICI BANK TAKES $263-MILLION SUBPRIME HIT

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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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