Sentiment would be quite bad for ICICI Bank

CNBC-TV18’s Executive Editor, Udayan Mukherjee - ICICI Bank was a bit unconvinced while the ICICI management’s point is taken that the distinction needs to be made between owning a sub prime asset directly and getting a tertiary loop in that sub prime asset through the kind of products that they have leveraged in. I still think that the mark to market shouldn’t be ignored.

The clearest analogy that one can have is what happens with PSU bank stocks when bond deals harden in the market. They own bonds, yields go up, portfolios get marked down, they do mark to market and stocks generally under perform in a scenario where bond deals are going up at least PSU banks too. While the case is not exactly identical, that should be the analogy with which the markets, or investors should look at ICICI bank.

Yes it’s a mark to market. But if you look at how markets typically treat these mark to markets for financial stocks, they don’t distinguish too dramatically or drastically between the two and stocks generally tend to under perform. The biggest problem is that, the world has seen where some of the global banks started off their disclosures on sub prime, and where they ended up in the last one year. We just go back and see what Citigroup did, what UBS did and while they have a direct exposure to sub prime assets. Some of the pain or a large part of the pain which they are also feeling is indirectly because of this mark to markets.
 
So that’s the fear which a lot of investors have right now, that could this just be the tip of the ice berg. For ICICI Bank which has reasonable exposure to global loans, it has two large subsidiaries in the US and the UK and a fairly significant multi Billion dollar global loan book and credit exposure book. Could there be more which surfaces which we can’t see today? That is pretty much the question which a lot of investment banks are raising this morning. If you look at the opinion which is come in, Merrill Lynch has lowered its price target on ICICI Bank by 17%, Morgan Stanley says that “Given that credit markets have clearly weaken since then, we wouldn’t be surprised if this loss is higher and there were fixed income books, the subsidiaries of USD 3.8 billion which is a bit how of the money right now.” Citigroup is saying “The new disclosure is a bigger disappointment in risk, combined should hurt earnings and valuations, we believe that at Citigroup there is a higher possibility of credit risk here and raises the risk profile of the international portfolio.”
 
The world is in a situation right now, where after seeing what has happened in the US, they are prone to be believing the worst about what might blow up in their face in terms of sub prime exposure. To that extent, I think sentiment would be quite bad for ICICI Bank. The bank represents still a very strong and good value at Sub-Rs 1,000 levels, currently trading at Rs 970. The valuations have corrected quite significantly. From the peak, the stock is down 35%-36%, over the last month or two, so the stock has corrected quite significantly. You just need to weigh how much sentiment will get dragged down because of this and whether there is a possibility that more bad news is yet to follow which the bank cannot see yet as has happened with some of its global peers like Citi, UBS, etc. over the last 6-12 months. You can’t wish away those concerns as those might be legitimate.