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ICICI’s Disclosure See-Saws: Openly Making Fools Of Us

Statements from ICICI:

  • Sep 2007: “..treasury income was Rs. 1.75 billion which was a decline over last year Q2 of Rs. 2.4 billion, a 27% decline that was mainly because of the mark-to-market impact on our credit derivative portfolio which was about Rs. 1.00 billion that we have taken at September 30th.”
  • Jan 2008: “treasury income for the [Q3] quarter of Rs. 2.82 billion is net of mark to market impact on our credit derivative portfolio of Rs.1.50 billion during the December 31 quarter, in addition to about Rs.1.20 billion that we have provided in September quarter.
  • March 2008: “As of January 31, 2008, the mark-to-market negative on this portfolio due to movement of credit spreads was about $155 million [Rs. 600 cr.] of which $88 million [Rs. 350 cr.] had been provided for in the financial statements of the bank for nine months ended December 31, 2007”

So in September they said 100 cr (1 billion). Then in Jan they said 160 cr. plus 120 we did in September. Where did the additional 20 cr. suddenly popup from?

Still, that’s 260 cr. Now they’re saying 350 cr. already done – hello? What is this? We are being lied to – or someone is picking up numbers from the air.

Still, the real losses are more no? About 1000 cr. Where’s the remaining? Supposedly it’s “investment losses” that we shouldn’t care about. Uhm, sorry but we do care. Any “investment loss” is still a loss, and regardless of what you classify it under, you have LOST THE MONEY.

They have said, “the bank and its overseas banking subsidiaries have fixed income investments, whose marked-to-market losses are $108 million as on January 31, 2008. Of this, $101 million has been accounted for in the financial statement for the December quarter.”.

Where is this mentioned? Nothing has been specifically mentioned about this either in the conference call or in the results. Now they say it has been accounted – I don’t believe them one bit.

They also say there is some CDO exposure and then quickly say the underlying are Indian companies. CDOs are made out of a pool of loans and I don’t think they have made a pool of ONLY Indian Company loans (if this is wrong, please reveal it ICICI). Mainly because the pool will have 10s to 100s of loans bunched together. That means any CDO investment will have SOME exposure to non Indian companies, and even if you think India is God’s favourite country and no company in it will default, it leaves ICICI exposed to some potential default. The market obviously understands this and has priced it that way, hence the mark-to-market losses.

We need a far bigger disclosure. What are these mark-to-market investments, and if CDOs what are the underlying? How much is the real number, and please get this audited because I for one do not believe your figures, they seem to randomly change every few months!

This could be another Enron in the making, folks. Watch out.

  • Prakash says:

    >Won’t there be any auditing for these guys? Or they simply claim something?

  • Anonymous says:

    >So what is the impliction for us ordinary folks?

    Depositors > Rs. 1 lakhs

    Share Holders

    Should we withdraw the deposits and move to safe public sector banks. Should we sell the shares (lest it falls to one or two rupees)

    Should we take some more loans so that we can win when the ship sinks.

    Or is it a overreaction to the whole situation as Indians have no idea about Subprime Tsunami.

  • Deepak Shenoy says:

    >anon: If this kind of hiding is rampant, I don’t know what else is written in there.

    There seems to be no solvency issue (they have TONS of capital now) at the moment. So I doubt this is going to affect depositors in the near term – a lot more such news has to hit in order for solvency to be in question.

    Taking more loans makes little sense – they will sell the loans to someone who will recover from you, even if they sink.

    Shareholders may see a price drop – but again, unless there is much more hidden under the carpet, the share price won’t go to 0.

  • Rohit Chauhan says:

    Although it would good to have more disclosure, it may be risky for a bank to do so also.

    In addition the changes in the loss estimates seem to consistent with what is happening in the market. For derivatives, accounting requires that the losses of mark to market are passed through the P&L even if the contracts are held to maturity (see this years berkshire hathaway AR for some discussion on this)

    So as the markets are detiorating, the mark to market losses could increase and the bank will have to recognize them. This is also consistent with the banks claims that these are held to maturity and may not have losses (similar to a goverment bond portfolio where you may have mark to losses, but if you hold the bonds to maturity there may be no losses).

    I am not saying that is case with icici, but it may be possible. Also icici may be communicating only required information, but i really doubt they can fudge the data without a serious consequence.

    regarding the solvency, the bank has a networth of almost 12bn USD. Even if they lose 50% of their derivatives portfolio, you are looking at a drop in the CAR from 15% to somewhere around 13-14%. Not good for the stock, but definitely a solvency issue. In addition the bank has a lot of assets on the books at book value like their insurance subs, icici direct etc. so they do have some hidden assets too.

    disclosure – i am neither long nor short this stock

  • Deepak Shenoy says:

    >rohit: Good points. Now a hold-to-maturity model may work but my concept is that if there is a market price we should see it. If ICICI holds shares of 3I infotech and that share doubles in value, would you not see it added to P&L? Even if 3I was overvalued 10x in a boom, ICICI would book profits.

    A market rated investment must be treated as market. I don’t know if what they are saying is true i.e. if hte exposure is only to Indian blue chips. And even then I don’t know if credit risk is big. For instance if Corus were to try and refinance some of its bonds today it would simply not get the liquidity and may then default on its other bonds. And ICICI may have exposure to those bonds.

    Secondly, they HAVE fudged the data, as I’ve shown – three different figures in 6 months about what happened in the past.

    Solvency: Interesting point there. Does 15% CAR drop affect solvency? I have no idea how this works – should read up.

    Hidden assets wise – there is some value in there and yes unlocking will give some benefits. But I doubt they’ll be able to get the pieces right. The brokerage arm will suffer as volumes go thinner, the insurance arm will see its first big series of withdrawals and payouts from 2010 and the mutual fund arm isn’t doing much anyhow. Tough few years. If they get through them ok, we should see a good rise, though it’s looking bleak now.

  • Rohit Chauhan says:


    error in my previous comment –
    solvency is threatend for a bank when CAR drops below 8%. At that point either the bank raises more capital or closes shop. so for icici a 1-2% drop in CAR will not threaten solvency

    If i recall correctly, a bank’s bond portfolio is split into two parts – held for marturity and held for trading (may be not the exact terms).

    accounting varies for these portfolios. held to maturity is stated at cost and i think does not require any impact to profit or loss till maturity.

    held for trading is treated differently – any profits or loss requires p&l pass through.

    A lot of banks can shift between these two portfolios ..not sure what rules are there in place for that ..but i think there are some RBI regulations.

    for : when the interest rates were falling a few years ago, a lot of banks booked a good profit on the bond portfolio. when they started rising, with RBI’s permission some of these bonds moved to held to maturity

    derivatives i think come under held for trading. so they may have to book the profit or losses …what icici seems to be saying is that we will hold till maturity so will not have any losses (who knows)

    stocks dont have a maturity so they must be stated at cost or market – whichever is lower till they sell the stock. at that time the bank can book the profits.

    my point on hidden asset is towards the solvency issue …the bank may have losses due to derivatives, bad housing loan..but has some assets to balance them.

  • Kannan says:

    Did you check theie US SEC filings? Probably they would have mentioned as it wont be read by any indian analystes. I thought of doing it..but did not.

  • Deepak Shenoy says:

    >Rohit: Thanks for that mate – awesome comment! Very helpful – I think I now know what answers to look for.

    kannan: Checked. Here’s where you can check too. Nothing much of substance there either – and thanks for bringing it to notice! Will check out there often.