With Lehman Brothers filing for bankruptcy in the US, the country's largest private bank ICICI Bank is expected to lose approximately $80 million (Rs375 crore), invested in Lehman's bonds through the bank's UK subsidiary. As part of its treasury operations the bank had undertaken transactions with Lehman Brothers entities as counter-parties.
ICICI Bank said in a statement that its $80 million invested in the Lehman bonds constituted less than 1 per cent of the UK subsidiary's total assets of about $8.7 billion at that date and less than 0.1 per cent of the ICICI Group's consolidated total assets of $112.6 billion (Rs4.8 lakh crore).
According to ICICI Bank's joint managing director Chanda Kochhar, ICICI Bank UK PLC already holds a provision of about $12 million against investment in these bonds. Considering a 50-per cent recovery estimate, the additional provision required would be about $28 million. "There is no other material impact on ICICI Bank or ICICI Bank UK PLC on account of exposure to Lehman Brothers," she said in the statement.
ICICI Bank trimmed its credit default swap (CDS) exposures of $650 million in overseas corporates to $80 million, during this quarter. The bank is also likely to be marginally affected on its investments of $1.5 billion CDS of Indian papers.
Further the bank will also have to consider making additional provisioning on its investments in corporate bonds and on CDS exposures of Indian corporates, which may not be of a substantial nature.
ICICI Bank, India's second largest bank after SBI, is among those with a large exposure in the international market, which makes it sensitive to any turmoil in the global financial markets.
In its international books as of March 2007-08, the bank has already made a provision of $188 million. However, the UK subsidiary's mark-to-market losses are expected to be of a higher value. Bank officials say, that the mark-to-market on corporate bonds could change if the Fed cuts rates.
ICICI Bank's profit took a hit of more than Rs 1,050 crore ($264 million) for its investment in the European market at the beginning of the subprime loan crisis in the US.
Besides ICICI bank, public sector banks like State Bank of India will have to take a mark-to-market hit on their investments and some banks have also invested in Lehman Brothers said a senior bank official. However, the public sector banks are somewhat insulated from the US crisis, as their exposure is limited.
ICICI bank has had to compete aggressively with foreign merchant bankers, but with the fall out of Lehman Brothers and Merrill Lynch, the way for ICICI to gain ground in these segments seems to have been made easier. That also leaves other two players like HSBC and UBS to benefit from the current scenario.
The bank's operating profit excluding treasury for the first quarter of 2009 increased 74 per cent to Rs. 2,308 crore (US$ 536 million) from Rs. 1,330 crore (US$ 309 million) for the corresponding quarter last year and net interest income increased 41 per cent to Rs. 2,090 crore (US$ 486 million) for the first quarter of 2009 from Rs. 1,479 crore (US$ 344 million) for the corresponding quarter last year.
ICICI Bank UK Plc and ICICI Bank Canada raised about US$ 1.5 billion of retail deposits in the first quarter of 2009 and was ranked #1 in offshore loan syndications of Indian corporates during January-June 2008.
The Bank's capital adequacy at June 30, 2008 as per Reserve Bank of India's revised guidelines on Basel II norms was 13.42 per cent (including Tier-1 capital adequacy of 11.29 per cent), well above RBI's requirement of total capital adequacy of 9.0 per cent.
(Full text of ICICI statement)