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First of all let me clarify that in my opinion, there is *absolutely no chance* that ICICI Bank can collapse. Its too well capitalized, its too big and its too important to the Indian financial system for that to happen.

I posted a small article this morning, which has been getting a lot of pageviews. I never expected, however that I’d get a response from ICICI themselves. This is what they left in the comments section of my post:

September 30, 2008

Dear Sir/ Madam,

We greatly value your relationship with us. In the context of the developments in the international financial markets, we thought it pertinent to bring to you our perspective of the prevailing situation.

We would like to bring to your attention that the Indian banking system is well regulated and significantly insulated from global developments. This is because it is mandatory for all Indian Scheduled Commercial Banks to retain 34% of the deposit base in the form of Government Securities (SLR) and cash with RBI (CRR). Besides, sound policies of RBI have ensured prudent credit practices in the Indian Banking system.

ICICI Bank is already compliant with the BASLE II requirement in respect of risk management practices and capital adequacy. At 13.4%, ICICI Bank has one of the highest capital adequacy ratios in the Indian banking industry. Last year, ICICI Bank raised Rs. 20,000 crores (US $ 5 billion) of equity capital, which almost doubled our equity capital base. We have a net worth of over Rs. 47,000 crores (US$ 10 billion), again one of the highest in the banking industry in India We have consolidated total assets of over Rs. 4,84,000 crores (over US $ 105 billion), which is diversified across a wide range of asset classes across retail, wholesale and rural banking.

ICICI Bank is amongst the most profitable banks in India. In FY 08, ICICI Bank made a profit of Rs. 4,158 crores (US$ 900 million).

ICICI Bank has the highest credit ratings in the Indian financial sector. We have AAA ratings for our instruments, such as senior bonds, subordinated bonds, and deposits. We have the highest foreign currency bond ratings assigned to any Indian bank from Moodys and S&P.

We continue to invest in growth, indicating our confidence in the opportunities in the Indian market. In 07-08, ICICI Bank added 650 new branches, taking the total strength to over 1400 branches.

We thank you for reposing trust in us over the years. We look forward to setting new benchmarks in service levels in India and to create a bank that you will continue to be proud of.

As a testimony to the above, please find below the clarification given by Reserve Bank of India.

Date : 30 Sep 2008
RBI Statement on ICICI Bank’s Financial Position
There are reports in some sections of the media that based on rumours regarding the financial strength of ICICI Bank, depositors are withdrawing cash at its ATMs and branches in some locations.

It is clarified that the ICICI Bank has sufficient liquidity, including in its current account with the Reserve Bank of India, to meet the requirements of its depositors. The Reserve Bank of India is monitoring the developments and has arranged to provide adequate cash to ICICI Bank to meet the demands of its customers at its branches/ ATMs.

The ICICI Bank and its subsidiary banks abroad are well capitalised.

Alpana Killawala
Chief General Manager

Press Release : 2008-2009/412

Sincerely,

Nazia Sayeed
Office of Head Service Quality
ICICI Bank Ltd.

It was nice of the folks at ICICI to respond to my humble blog, albeit with a standardized message. I’d like to clarify that I don’t think that ICICI is going to collapse, but at the same time I do feel that it is relatively more at risk in terms of Subprime exposure than other Indian banks. I certainly do not think that given the level of depostitory requirements that Indian banks must comply with - that there’s any reason reason to start pulling out your money from ATMs. Just as the US government protect retail deposits, so would the Indian government. 

At the same time, there is the possibility that ICICI will face larger than expected losses from its exposures. Make no mistake - ICICI has already earmaked $260mn+ (Rs. 1000 Cr.+) for losses due to exposure to Credit Derivatives. This was way back in January, and then was talked about again in March. A *lot* of time has passed since March, and alot of negative developments have also taken place. 

My worry is that in light of the recent events (Lehman, HBOS, AIG collapse etc.) that there may be  further losses. That’s the scary thing about the Subprime mess. When on entity falls over - other firms it owes fall over. Those other firms also owe somebody, who owe somebody else and so on. Suddenly, before you know it, you thought that a counterparty that was good for its promise to pay you what they owe you, no longer is in a position to do so.  

According to this article in the Business Standard, its UK arm has 89% of its non indian investments book - estimated at $3.5bn - has an S&P rating of A- or above. ‘Only’ 18%, or $700mn has exposure to the US.  I think that an ‘A-’ isn’t a fabulous rating, mind you. The highest rating given by S&P is AAA, after which we have AA, A, BBB, BB etc. to until D. Note that BB and below is rated as ‘Non investment grade’ or ‘junk’. And remember, these are the same ratings agencies that gave AAA ratings to those Subprime backed assets that are actually at the root of this entire mess.

The article goes on to say that ICICI bank asserts that the UK subsidiary has ‘no exposure’ to US subprime. Surely they do have some exposure, albeit indirectly, otherwise they wouldn’t have had that $264mn mark to market loss in the first place?

In fact, according to this article in the Financial Express, ICICI bank has a total of $2.2bn worth of expsosure to credit derivatives. What the underlying for these credit derivatives are, we don’t know. To an extent that is not even that important. I wonder, has ICICI booked all of those losses? Did it close out those derivative positions? Hopeful they did.

Thus, while a ‘collapse’ of ICICI bank, in my opinion, is highly unlikely, we may learn of larger than expected MTM losses on the back of credit derivatives. If this does happen, while the depositor doesn’t have anything to be worried about, it wouldn’t exactly be good news for the ICICI bank shareholder.

Disclaimer: This is not investment advice nor should be construed as such. Do *not* make any investment decisions based on what you read in this article, or anything else on this blog. All views presented here are solely the opinion of the author’s.

Disclosure: I don’t own any shares of ICICI bank.

Tags: ICICI, Stock Market, Subprime

This entry was posted on Tuesday, September 30th, 2008 at 4:29 am and is filed under International. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.