There has been ample talk doing the rounds about Indian Banks’ holdings in foreign securities viz ICICI Bank’s holding of $80 million investment in Lehman, SBI’s holding of $170 million in Freddie Mac and Fannie Mae coupled with a $17 million exposure to Lehman Brothers and the Rs 400 crore worth loans to DSP Merrill Lynch Capital, but is there merit to these arguments? Many questions persist as to whether ICICI, SBI and other major Indian Banks may have other investment holdings overseas and if so then how much? Exhibit 1 is an extract from ICICI Bank’s 2007 – 2008 audited financials which will surely provide some clarity to this scenario.
After looking at the details in Exhibit 1 it is abundantly clear that ICICI certainly has significant investments and advances made overseas, apart from the Lehman amount of $80 Million which in INR stands at Rs.368 crores (1 USD = Rs.46). This represents a measly 1.68% of the total Investments of the overseas’ others’ portion, what the Bank must do at the earliest to alleviate investor fears is to elaborate where exactly does it hold its other Rs.22,372 crores investments classified as ‘others’.
An irony here is that the schedule VI provides for detailing the nature and name of companies and instruments in which the investments has been made for companies but this is no so for Banks. However, if this disclosure requirement was to be made to the investments made by banks then this entire fiasco prevailing could have been avoided and investor’s loss’s contained.
One should also take note that the advances made outside India by ICICI stand at a staggering Rs.67,500 crores. This stands at thrice the value of its overseas others’ investments! While it would certainly not be correct to deduce from the above that ICICI has investments in the bankrupt companies, however the investor must be informed in these uncertain times the details of where Rs.89,700 crores investments have been made! The credit crisis has not ended and it is now that the Fed has agreed to buyout the bad loans made by both international and US based banks that the skeletons from the closet are coming out at a much faster pace to access the Fed’s cash bonanza while exchanging their holdings of the CDOs and Sub-prime. The list of financial entities includes not only other US banks and offshore trusts but even Banks from nations as far and possibly remotely connected to all of this as Iceland (Kaupthing Bank) and Ireland (Allied Irish) let alone the Fortises and Santanders! The Fed which is already doing a great help to these financial institutions by lending almost a $1 trillion in short term loans to Banks and also will in most certainty not be as generous when it comes to buying these assets, it certainly would not buy at their book value as if it would do so it would only be another case of “Socialization of losses and privatization gains” as quoted by Alan Greenspan recently following the Fannie and Freddie debacle. Considering the cost to the tax payer and the government taking an enormous risk through this buyback expect a huge discount to the underlying value of the security. Now, what returns would ICICI bank’s Rs.89,700 crores stand to gain against this scenario? Anyone’s guess! Ditto for the other banks as shown in Exhibit 2 (Consolidated Figures)
An irony here is that the schedule VI provides for detailing the nature and name of companies and instruments in which the investments has been made for companies but this is no so for Banks. However, if this disclosure requirement was to be made to the investments made by banks then this entire fiasco prevailing could have been avoided and investor’s loss’s contained.
One should also take note that the advances made outside India by ICICI stand at a staggering Rs.67,500 crores. This stands at thrice the value of its overseas others’ investments! While it would certainly not be correct to deduce from the above that ICICI has investments in the bankrupt companies, however the investor must be informed in these uncertain times the details of where Rs.89,700 crores investments have been made! The credit crisis has not ended and it is now that the Fed has agreed to buyout the bad loans made by both international and US based banks that the skeletons from the closet are coming out at a much faster pace to access the Fed’s cash bonanza while exchanging their holdings of the CDOs and Sub-prime. The list of financial entities includes not only other US banks and offshore trusts but even Banks from nations as far and possibly remotely connected to all of this as Iceland (Kaupthing Bank) and Ireland (Allied Irish) let alone the Fortises and Santanders! The Fed which is already doing a great help to these financial institutions by lending almost a $1 trillion in short term loans to Banks and also will in most certainty not be as generous when it comes to buying these assets, it certainly would not buy at their book value as if it would do so it would only be another case of “Socialization of losses and privatization gains” as quoted by Alan Greenspan recently following the Fannie and Freddie debacle. Considering the cost to the tax payer and the government taking an enormous risk through this buyback expect a huge discount to the underlying value of the security. Now, what returns would ICICI bank’s Rs.89,700 crores stand to gain against this scenario? Anyone’s guess! Ditto for the other banks as shown in Exhibit 2 (Consolidated Figures)
For a better perspective on the percentage of losses possible it would be interesting to take note of eClerx Services Limited here. This company had Lehman as one of its major customers in the BFSI domain. On October 6th 2008, Eclerx lodged a disclosure with the NSE that “one of company's clients had filed a petition under Chapter 11 of the Bankruptcy Act in a New York court. The Company has now accepted a Cure amount of USD 561,340 proposed by the acquiring entity of the Company's previous client as full and final payment against the receivables of approximately a million dollars.”
Now all this is when we look at the asset side of the Balance Sheet but now looking to the liabilities portion ICICI Bank like other Indian Banks has borrowed massively from overseas markets so that they can play a well orchestrated game to borrow cheap and earn a tidy return by loaning the same in the Indian Domestic market at far higher rates. So far so good till around a few months back. But, things are ‘a changing’. In the past weeks central banks have released liquidity of almost a$1 trillion to assuage the liquidity crisis; moreover the LIBOR USD / EURO / GBP have reached record highs of over 6% compared to under 3% rates a month ago and still are showing no material signs of abating. So, what is the effect of this on Indian Banks? I am not an optimist here. Why? The $ 280 Billion central bank money giving spree and all the monies thereafter hasn’t really transcended in real effect to the economy but has been horded by the Banks to fund their requirements and replete their capital base. Also, the sacrosanct LIBOR is also taking a major blow of sorts as global banks are now negotiating to lend at their real risk adjusted cost of funds and not at LIBOR rates, simply put hence forth all contracts will bear a greater interest than before and following this the spreads of Indian Banks will come pressure, so game over? Well, maybe not yet but effectively we will be importing the sub-prime effects in our Banks and in our finances albeit the ripple effect will be felt in a few months and not immediately. If Indian Banks were to de-hedge from their foreign borrowings to India originated borrowings let alone the present liquidity crisis they would need to raise a colossal Rs.123,000 crores just for the 6 Banks as displayed in the table below that shows the foreign borrowings of leading Indian Banks per their 2007 – 2008 financials in Exhibit 3 (Consolidated Figures)
Now all this is when we look at the asset side of the Balance Sheet but now looking to the liabilities portion ICICI Bank like other Indian Banks has borrowed massively from overseas markets so that they can play a well orchestrated game to borrow cheap and earn a tidy return by loaning the same in the Indian Domestic market at far higher rates. So far so good till around a few months back. But, things are ‘a changing’. In the past weeks central banks have released liquidity of almost a$1 trillion to assuage the liquidity crisis; moreover the LIBOR USD / EURO / GBP have reached record highs of over 6% compared to under 3% rates a month ago and still are showing no material signs of abating. So, what is the effect of this on Indian Banks? I am not an optimist here. Why? The $ 280 Billion central bank money giving spree and all the monies thereafter hasn’t really transcended in real effect to the economy but has been horded by the Banks to fund their requirements and replete their capital base. Also, the sacrosanct LIBOR is also taking a major blow of sorts as global banks are now negotiating to lend at their real risk adjusted cost of funds and not at LIBOR rates, simply put hence forth all contracts will bear a greater interest than before and following this the spreads of Indian Banks will come pressure, so game over? Well, maybe not yet but effectively we will be importing the sub-prime effects in our Banks and in our finances albeit the ripple effect will be felt in a few months and not immediately. If Indian Banks were to de-hedge from their foreign borrowings to India originated borrowings let alone the present liquidity crisis they would need to raise a colossal Rs.123,000 crores just for the 6 Banks as displayed in the table below that shows the foreign borrowings of leading Indian Banks per their 2007 – 2008 financials in Exhibit 3 (Consolidated Figures)
So, should you be scared? I think I would! While I am not passing an opinion on the solvency of Indian Banks which I believe are adequately capitalised, I do have concerns on the aggresive stance of certain banks' assets and liability positions which could cause strains on their profit and loss account
* Disclamer - The views mentioned in this blog are my personal views. These views are neither endorsed by / supported by nor are they the views of anyone else / any other organisation. Kindly take your decisions on an informed basis, only after going through the financials of companies at your end and then consulting your financial advisor.
No comments:
Post a Comment