Its not really news when I say that we’re in a bear market (the widely accepted definition for western equity markets is a sustained 20% drop is much smaller than the 50% drop of the Nifty from our January high of 6357). But the question on everybody’s mind is - where are we in this bear market? The beginning, the middle, or at the end (the bottom)? Let’s have a look at the past three Indian bear markets and see if we can get some clues (data below sourced from Morgan Stanley Report, “India Strategy: How to Cope with a Bear Market”, published on 13 March 2008):

First: 2 April 1992 (top) - 26 April 1993 (bottom)

• Tipping point: Harshad Mehta
• Lasted for 56 weeks (just over a year)
• Sensex Peak at 4547
• Sensex Bottom at 2073
• Decline of 55%
• Time taken in days to cross previous high: 881 (2.5 years)
• 6 months return from the bottom: 34%

• Tipping point: Dot-com bubble bursts / Ketan Parekh scandal comes to the fore
• Lasted for 84 weeks (around 1 year 7 months)
• Sensex Peak at 6151
• Sensex Bottom at 2627
• Decline of 57%
• 12 months trailing PE at the Bull market peak: 33.9
• At the Bear market bottom: 13.6
• Decline of 60%
• Time taken in days to cross the previous high: 1425 (4 years)
• 6 months return from the bottom: 34%

• A bear market leads to an average decline of 51% of the index, and upto 60% decline in PE ratios
• If you managed to invest at the bottom, 6 months down the line you’d have made an average of 35% return (although spotting the bottom is near impossible - so this is rather misleading)
• It lasts anywhere between 1-2 years
• It takes anywhere between 2.5 to 5 years for the market to ‘recover fully’ to its previous peak - therefore the bear market is accompanied by a considerable ‘horizontal’ market
• The bull market peak is over 32x earnings (PE ratio), and tends to more than halve at the bottom.

The crash of the Indian Stock Market since January 2008 has been widely attributed to FIIs pulling their money out to meet liabilities and redemptions. According to this article, however, FIIs have only pulled out $12.7bn and still have another $53.7bn, or almost Rs. 270,000 Cr. left in the market. 

A lot of market experts are talking about the market being near the bottom (”Valuations just cannot get any cheaper! The Indian growth story is sound, even at 7%!”) Let’s be clear on this: these falling prices are not about fundamentals - its simply about lack of liquidity. FIIs are not exiting the market because they want to, but because they are being forced to - nobody wants to book such massive losses, and nobody would argue against the fact that as an emerging market India is looking pretty cheap.

The fact that there’s so much FII money still in the market - 80% - is quite scary Read the rest of this entry »

There has been a lot of discussion / panic in the markets with regards to ICICI bank.

Nobody really knows what’s going on, but everybody is worried (see this article, which was a result of the response I got from ICICI bank for this article). What we do know is that there were intial reports in January, and then in March we were told that ICICI bank had declared over $260mn in credit derivative losses, on a total exposure of $2.2bn. In mid September there were rumours floating around about ICICI bank going under. These were put to rest by assurance by Kamath, SEBI and the RBI. Then there were more rumours a couple of days ago, and it almost seemed like there was a bit of a run on the bank, with people in Hyderabad, amongst other places, lining up at ATMs to pull out their cash.

While my view is that there isn’t smoke without a fire, and even Bear Stearns denied initially that there wasn’t anything wrong. While I think that ICICI bank shareholders might see a further deterioration in share price, I don’t think that people holding accounts at the retail bank really have much to worry about.

ICICI bank’s business, like any conglomorate bank, can be broadly categorized into - the wholesale/ investment banking arm, which would bear the exposure to the credit derivative instruments, and the retail banking side, which takes deposits from individuals and small businesses. I couldn’t manage to get a hold of the corporate structure or of ICICI Bank, but these businesses should be structurally separate even if they are owned by the same holding company, ICICI Bank.

If this is the case, it would mean that while the shareholders are exposed to both businesses, the customers of the retail bank are relatively safer from the effects of the losses of the wholesale banking / investment banking arm.   

Also, as ICICI sets out above, 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).

Retail depositors are also protected to a limited extent (Rs. 100,000) by depositor insurance (check an article about depositor insurance here: www.rbi.org.in/Scripts/FAQView.aspx?Id=64).

I also believe that like the Fed could not let AIG, an institution that is far to large and far too embedded in the livelihoods of the American population, fail, similarly, the RBI would never let India’s largest private bank fail. 

So if I was an ICICI bank retail depositor. I wouldn’t go running to ATMs to pull my cash out, just yet.

Disclaimer: This blog or any other content on this blog should not be construed as financial or investment advice. All views presented here are solely the opinion of the author’s.

Disclosure: I don’t hold any positions in ICICI Bank. 

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.

Somebody called me early this morning telling me that they had heard fresh rumours that ICICI bank was going to collapse in the wake of the credit crisis. Clearly, a number of people in Hyderabada also heard this rumour, and panicked. According to this TOI story, people were lining up at ATMs to pull their money out. 

On September 17, ICICI bank’s management strongly denied rumours that the management was offloading ICICI shares. Share prices dropped from Rs. 720 on September 8 to Rs. 560 on September 17. They rose again to Rs. 634 on September 22, and are currently trading at Rs. 493, marginally down from yesterday’s close. 

In my opinion, while ICICI may have not insignificant Mark to Market (MTM) losses from its exposure to credit derivatives, there is *no way* that ICICI bank would collapse. It’s India’s AIG, for all practical purposes. As the second largest bank in India, the regulator would never let such a thing happen. Moreover, even if it did face large MTM losses, given the fact that it recently raised $5bn in equity capital - I imagine that this is more than enough to tide it over in uncertain times. 

If you don’t believe these rumours, then ICICI is looking pretty attractive, trading at a PE of 15, and almost a third of its yearly high in January of Rs. 1440.

Disclaimer: This post or any other content advice is not investment advice and should not be construed as such. All views presented here are solely the opinion of the author’s.

Disclosure: I don’t hold any shares of ICICI Bank. 

One week ago, this wasn’t likely. 

Even those who were smart enough to recognize that the independent investment bank model was no longer viable thought that Goldman would get acquired. 

There were whispers that the ~ GBP 103 Billion HSBC (the only mega cap bank stock to actually give investors a positive return year to date), would be the one to pick up the franchise. I for one, was one of the people who liked this story – it made sense right? There really didn’t seem to be anybody else who had the firepower at least liquidity-wise to pull off that kind of trade. 

I was naive. I forgot about Goldman. 

Firepower clearly has nothing to do with liquidity. The kind of lobby that Goldman commands is undeniable. How else do you explain the fact that Bear, Merrill, and Lehman were allowed to fail Read the rest of this entry »

Many are loudly criticizing Paulson’s mega bailout fund. $700bn is not a small amount  considering the fact that the global GDP as of 2007 is estimated at around $55 trn (1% of global GDP), and the size of the US economy is around $14 trn (therefore around 5% of US GDP).

People are saying that the US taxpayer is getting squeezed from every which angle to make up for the irresponsibility of mega ‘sophisticated’ financial institutions. Not only is he having to deal with a fall in the prices of his real estate assets, costlier credit, job insecurity and business uncertainty, he’s now having to subsidize something that he doesn’t even understand. This is not entirely true however Read the rest of this entry »

I did a stint at AIG about a year back, helping them with restructuring their UK business into a consolidated entity. They were speaking to Standard & Poors to get a credit rating for the consolidated entity. They got the rating that they were looking for. I wasn’t surprised, the amount I heard about AIG’s gold standard risk management infrastructure and the highly risk averse investment mandate.

Of course this didn’t help much when the $440bn worth of Credit Default Swaps (CDS) that they issued to everybody and their uncle Read the rest of this entry »

A lot of people were criticizing BoA for overpaying for the third largest investment bank in the world at $50bn. Only time will tell, of course, but my feeling is that they did quite well to time the acquisition just days before the secretary of the US Treasury, ex-CEO of Goldman Sachs, Hank Paulson unveiled his plans to save the world through his $700bn US government fund.

After this announcement, most banking stocks that had been so badly beaten down over the last rallied 30% on Friday, and the UK FTSE closed a record 8% up. Such movements are unheard of in mature markets such as the US and the UK. If BoA had waited around, chances are that they would have had to pay more than the $50bn. Read the rest of this entry »

We haven’t heard much (except Bhave telling some investors that SEBI may allow it, read BS article here) about Real Estate Investment Trusts (REITs) since SEBI released the draft guidelines in December last year - but I think that its a very interesting concept and worth a revisit.

Real estate in India has experienced exceptional growth since 2004-05, with some cities even experiencing a more than 50% price rise on a compounded annual basis. While pundits and the common man alike are slightly nervous owing to double digit inflation, rising crude prices, and a stumbling equity market - leading to a cooling of real estate prices in tier 1 cities, residential and commercial real projects in tier 2 and tier 3 cities are holding firm. 8 months have already passed since the equity market crash of January this year, and while many are forecasting a further drop in the markets, others are talking more optimistically about us already having bottomed out, and the interest rate cycle having peaked. This bodes well for the real estate market, and as inflation and interest rates start coming off over the next 6 months (we hope) - this will lead to a resumption of the real estate bull run.

With this backdrop, Indian investors are slated to have access to real estate investment trusts (REITS) as the country is poised to embrace deregulation and further formalization of its booming real estate market.

The move is driven in part by the demand fuelled by domestic players looking to implement ambitious expansion plans. Reits have been introduced in most of Asia’s leading markets (Singapore, HK and Japan) in the last seven years and the introduction of Indian Reits will prevent the profitable Reit business going overseas. Moreover, as property prices in the the US and elsewhere crumble in light of the subprime mess, foreign investors seeking to allocate their capital to real estate will seek to put their funds elsewhere - e.g. developing economies such as India, where although there has been recent turmoil, fundamentals are strong, and this may be a good opportunity to get in at a bargain. Reits would certainly be a mechanism that simplifies investment Read the rest of this entry »