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Response from ICICI Bank to my post ‘Fresh Rumours: ICICI Bank Collapse imminent? Not likely.’

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.

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This entry was posted on Tuesday, September 30th, 2008 at 4:29 am and is filed under Business News, Finance, Foreign Investment, Interest rates, International News, Investments, Media, Stock Market. 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.

Viewing 7 Comments

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    Hi Gautam,

    Just a factual correction. As per BS article, 89% of ICICI UK's non-India investment book (estimated to be around $3.5 bn) has been rated A- or above by S&P. Agreed, A- is not that good a rating, especially in such times.

    I do agree ICICI may have some more toxic waste to show up after its last announcement of Rs.1000 crore in Jan and March. The market knows it better than anybody else. That is evident from wat happened to stocks of each of these top investment banks of US before their fall. So, there are smart ppl in the market who at least have a broad idea of wat is coming if not the specific details.

    However, being an Indian bank complying with stringent RBI regulation, the situation might not be as bad. Looking at the stock price, i feel buying in parts anywhere around 450-500 would be advisable. However, need to keep a close watch on the position.

    Disclosure: I dont own any shares of ICICI Bank
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    kpst - thanks for bringing the error to my attention - have made the correction, and added another para in as well...
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    I think the worry in the mind of most Indians is not about share price of ICICI Bank but of their assets- bank accounts, FD, etc also of companies which are doing business with ICICI Bank.
    The issue is much larger than share prices because the number of people with an exposure to the shares of the bank are just a fraction of the number of people who have some sort of banking relationship with ICICI Bank
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    I think that you are right when you say that ICICI bank is not going to collapse. The regulators are never going to allow that. I hope that after the reserve bank decided to reduce the credit reserve ratio for scheduled banks, the banks are breathing a sigh of relief.

    I am happy at least that ICICI is making an effort to reassure depositors, regardless of the fact that the message is standardized and yeah do you think the company should really have a non standardized response to such an important issue?
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    Well I can understand that they have to put up a uniform face, and I haven't got any real problems with that, except that they're not really answering the question at hand: What is the full extent of your Mark to Market losses from your exposures to Credit Derivatives? Has it gone up from the $260mn that you reported earlier? Have you squared off these exposures? Telling me things like 'ICICI is well capitalised' and that the 'RBI has retained prudent credit practices' doesn't really tell me anything, does it?
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    @manoj - while i have no way of check facts i visited the consumer forum consumercomplaints.in and did a quick search of SBI and found 9981 results. For ICICI I found 6023 results and for HSBC I found 1195 results.

    Based on this evidence and gut feel - I cannot really believe that ICICI bank is *any worse* than SBI etc. in terms of complaints in general. I can see however, how state banks might be a little bit more lenient in debt collection etc.

    All the same, this post seeked to explore the financial stability to ICICI and expected future performance rather than weight its pros and cons versus other banks.
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    The Fatal part is that, ICICI is a bank (probably the only) bank that has a bad business ethics & practices among the entire banking sector in India. There are so many out there (the common people who really struggle daily for their bread and butter) who once believed ICICI as the common's bank. Somehow in the initial stages ICICI was successfull in developing this inconspicuous image among the public. Unfortunately the bank has failed miserably in handling peoples money by making wrong investments, foolish speculations & their greedy attitude of only filling the tummies of its share holders.

    This bank (it's employees) has so much of antisocial practices & frauds which has even taken lives of so many people and shattered their families. Starting from second accounts to hawalas to fake currencies to money laundering and what not....... If you check with the Police Stations in Kerala, you will come across atleast 2000 complaints against ICICI & atleast 300-350 registered crimes in the year 2007-'08 alone. I myself has moved a criminal complaint against ICICI bank against Cheque Tampering by one of the Credit card division Manager. (He is now absconding)

    I think this is high time we all realize the value of our nationalized banks & their services. My appeal to all is that ... Better Late than Never......
 

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