Subprime crisis to hit 4 big banks' profits

Shriya Bubna & Abhijit Lele / Mumbai January 7, 2008

SBI, ICICI, BoB, BoI to book losses on credit derivatives.

State Bank of India (SBI), ICICI Bank, Bank of Baroda (BoB) and Bank of India (BoI) are set to book mark-to-market losses on the exposures of their foreign offices to credit derivatives, with the spreads on these widening since international lenders turned risk-averse following the crisis in the US subprime (or high-risk home loan) market.

Credit derivatives are instruments for which the underlying asset is a loan or a bond. Marking to market means valuing a portfolio based on the prevailing market price.

The significance of this move is that the net profits of the four Indian banks would be dented for the third quarter ended December 31, 2007, to the extent of the provisions that they decide to make.    SUBPRIME CHILL   Exposure* Provisioning ** Rs crore $ Rs crore ICICI Bank 1.5 billion 6,000 100 SBI 1 billion 4,000 NA Bank of India 300 million 1,200 5-6 Bank of Baroda 150 million 600 60 * Note: Exposure to credit derivatives (estimated) — the mark-to-market losses on these portfolios could range from 5 to 10 per cent ** Provisioning for quarter ended Sept 2007

ICICI Bank, the country's second largest bank, has the highest exposure of $1.5 billion (approximately Rs 6,000 crore). SBI, the country's largest bank, has an estimated exposure of $1 billion (Rs 4,000 crore), BoI $300 million (Rs 1,200 crore) and BoB $150 million (Rs 600 crore).

The mark-to-market losses on these credit derivatives portfolios could range from 5 to 10 per cent. Though these over-the-counter exposures are not required to be marked to market by regulations, banks have been making provisions for them globally.

All four banks have already made provisioning on account of marking-to-market credit derivatives for the quarter ended September 2007.

A senior ICICI Bank official said: "We made a provisioning of Rs 100 crore in the quarter ended September 30, 2007. However, this impact was offset by other treasury income of Rs 300 crore to Rs 400 crore."

Close to 70 per cent of ICICI Bank's exposure to credit derivatives is to Indian corporations, while the remaining is to foreign companies.

For the second quarter of 2007-08 for mark-to-market losses on these exposures, BoB provided around $16 million (or close to Rs 60 crore) and BoI Rs 5 crore to Rs 6 crore.

SBI did not respond to e-mail queries sent to the bank's chairman on the bank's exact exposure and provisioning requirements.

A BoB official said: "For the December quarter, the additional provisioning would be nominal; maybe a couple of millions more."

The Reserve Bank of India, in its latest progress report on banking in India, noted that some Indian banks with overseas operations do have some exposure to credit derivatives and there could be some losses due to mark-to-market impact.

However, it said such exposure was "very limited" and that banks did not have any direct exposure to the US subprime market, it said.

The main variants of credit derivatives include collateralised debt obligations (CDOs) and credit default swaps (CDS).

CDOs are securities backed by pools of other securities and bought by investors wanting exposure to the income from a set of loans or bonds but not direct exposure to them.

CDS is an agreement whereby a lender transfers a credit risk to a counter-party (say, another bank), which agrees to insure the risk and receives periodic payments like an insurance premium.

If the lender's client (borrower) defaults, then the counter-party to the CDS agreement pays the lender the outstanding principal and any remaining interest and buys the defaulted asset.