Mark to Market and Mark to Model algorithms are flawed meaning they don’t value a derivative accurately. They don’t clearly show the underlying weakness or risk in the derivative. Most of the time, they over rate a derivative and hence markets are not taking the Mark to market losses at their face value. They know the losses are much more than what these algorithms are saying.
Don’t believe ICICI bank, if they come out next quarter with Mark to Market losses of few million dollars.
Legally they are not wrong in under reporting their losses as per these models, but ethically they are wrong.
If they say that these are notional losses, then they are wrong again because the chances of recovering from these losses are very grim. Most of US banks have written them off and don’t believe in recovering from these losses.
Banks are on a downward trend for many reasons in India.
1) Unrecoverable losses in derivatives and forex hedging.
2) Rising retail loan rates pose a danger for their growth.
3) Rising inflation will curtail their growth further because people’s borrowing costs rise that much more.
I won’t be surprised if i see ICICI bank scrip below RS 500.
Investors in ICICI bank should thank God, If their exposure to Derivatives (traded and non-traded) is only $2-3 Billion. In that case, the maximum loss could be that much only ($2-3 bilion).
However, i doubt it, their exposure to US markets could be much more than that and they may be in other risky investments too.
It is best to avoid Bank stocks untill they come out and clearly say what their exposure is.
Filed under: Finance India, India blogs, Indian Bloggers , BSE, IBN, ICICI, ICICI bank, ICICI bank esposure to subprime market, ICICI banks exposure to derivative markets, ICICI banks exposure to derivatives, ICICI exposure to derivatives, Mark To Market, Mark To Model, NSE, sensex, subprime
Atlast ICICI bank scrip is below RS 500. I thought this event would happen lot sooner, but it took 6 months for my prediction to come true.
I am now predicting that ICICI scrip could go lot lower than this and there are many more reasons now.
1) Lehman brothers and WaMu bankruptcy has pushed down the derivative prices lot lower than what other investment banks are pricing it on their balance sheets. These banks are reporting losses with 70-80 cents on a dollar. However, the price has gone down now to 15 cents on a dollar. With this pricing, ICICI bank could report much wider losses in the next quarter, unless US taxpayers bail them out with $700 Billion package. As per the details, the tax payer money is being used to buy these toxic investments at a price above 50 cents on a dollar.
2) ICICI bank is still hiding its over all exposure to this unregulated market. This is what scares me as an investor.
3) ICICI bank’s growth prospects are dim given the Global economic slow down and Indian real estate market slow down as well as credit defaults of many bank customers.
I am predicting that ICICI bank’s scrip could go down to RS 200- 250.
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