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ICICI Bank: What’s The Subprime Impact?


So how much does ICICI stand to lose if the news is correct? (Ref: ICICI subprime losses at 1000 cr.). ICICI’s share dropped 5% to Rs. 970.

They made about 1260 cr. of profits last quarter, a quarterly EPS of 11.9. THat means this loss is about Rs. 10 per share of EPS. If they take the entire hit this financial year, I assume it will mean that they have an EPS of about Rs. 2 in the last quarter, a total EPS of around Rs. 32 for the year 07-08. [Note: 50m is already taken, the rest is yet to be taken]

The 06-07 EPS was around Rs. 34. That means they will suffer an EPS negative growth this year. We’re already paying a trailing p/e of 30 (at current price of Rs. 970)

What will it take for this price be worth it? A 25% growth in EPS over last year. On 111.25 cr. shares, we are talking about a profit of Rs. 4400 crores on the year. Achievable? Yes, if:

  • There are no more MTM losses. Marked to Market losses means they haven’t yet booked the losses. The credit markets in the US are [bad word]ed. Absolutely and totally [bad word]ed. Chances are ICICI can’t even book the losses if they tried, because there is no liquidity in these markets. More horror to come? Most likely yes; the minister’s statement was as of January, and the CDS losses since then are another 10% or so since then (on the super senior tranches). Now that can mean a further loss of about 600 cr. to ICICI if it’s true.
  • EPS growth must be maintained. They had just 2% EPS Growth last quarter, and they have been selling their NPA home loans. Is the market turning sour on ICICI?
  • One needs to remember that EPS is more difficult now that the number of shares has dramatically increased. ICICI must find good avenues to deploy this cash, in a market that seems to be going into a recession.
  • If they don’t do funny things with accounting. The latest news is:

    Kochchar said the bank will book ‘mark-to-market’ loss of 70 million dollars on its investments in this quarter as credit spreads have widened due to subprime crisis.

    “We have accounted for the loss of about USD 90 million up to December, 2007. In this quarter, we have provided for a marked-to-market loss of about USD 70 million – USD 50 million in ICICI Bank and another USD 20 million in ICICI Bank subsidiaries,” Kochhar said.

    She clarified that the other USD 100 million losses, was on the composition of pure investments and notional in nature with no impact on the balance sheet.

    “The securities are in the nature of investments and not loans so we have to mark-to-market the portfolio. However, they are good investments and have a sound underlying repayment schedule and the money is coming,” she said.

    I have a problem with this line of thinking. If the mark-to-market had INCREASED the value, Ms. Kochchar would be happily accounting for it as profit and saying it proves the real worth of ICICI and bla bla blah. Now because the market doesn’t think their loans are quite as safe as they think, we should buy their argument that ICICI knows better?

    If something goes wrong and the company defaults, no lender gets paid. In all probability ICICI has written CDSes based on some Indian companies’ loans, which they think will not default. But what if they do? The market certainly seems to think they might.

    This kind of funny accounting (not taking the hit on the losses, saying they are “investment losses” – what is that anyway? a loss is a loss – etc. is simply ridiculous. They’re postponing the inevitable. Even worse, this can actually be an accounting scandal, but I don’t want to get into that.

The fall in the stock price seems quite deep. On a pure fundamental basis, if they do write down all the losses, they should command a stock price of around 760 to 800. A growth of about 20% is more likely which is what I’ve based the P/E on. But if they can show the growth promised – 25% – then the current market price is good, at Rs. 970. But there’s not much in terms of upside from here.

Disclosure: No positions. I’m not going short because the impact seems to be downplayed and accounting rules let them get away with it. A good time to short will be if they do badly AND the stock stays at these levels in April.


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