Sub-prime singes bank stocks

The banking stocks took a beating on the bourses on Monday due to the global subprime crisis and concerns that Indian banks' profitability may be affected by their exposure to exotic derivatives. The BSE Bankex was down by as much as 9.87 per cent.

Analysts said that investors were wary of banks having to take a huge hit on account of exposure to exotic derivative structures. 

	28-Feb-08	17-Mar-08	%change
ICICI Bank	1103.5	757.4	-31.36
PNB	581.29	457.05	-21.37
AXIS Bank	1003.6	792.85	-21.00
SBI	2038.7	1633.4	-19.88
HDFC Bank	1471.05	1238.5	-15.81

Many new generation private sector banks and foreign banks that sold such exotic derivative structures now fear litigation.

Banks may have to take the losses accruing from a possible non-payment by corporates, predominantly small and medium enterprises (SMEs), on their books.

"The exposure of banks to the credit crisis is being overdone. The bonds held by banks carry a tenure of four to five years. The spreads will improve over time and banks will make gains on these investments in the long run. Globally, investors are shying away from financial companies and the scenario is no different in India,'' said a banking analyst.

The shares of major banks such as the State Bank of India (SBI), Punjab National Bank (PNB), ICICI Bank, HDFC Bank and Axis Bank received a hammering. ICICI Bank lost 13.76 per cent to end at Rs 757.40 on the BSE.

The country's second largest lender had to make an additional provisioning of $70 million in this quarter for mark-to-market (MTM) losses incurred by its overseas branches and subsidiaries following their exposure to credit derivatives. The spreads have also widened further due to the continual impact of the sub-prime crisis.

This has not gone down well with the market participants. The bank's total depreciation losses on collateralised debt obligations (CDOs) and credit-linked notes (CLNs) held in overseas operations amount to $264 million, as on January 31, 2008.

Raamdeo Agrawal, joint managing director, Motilal Oswal Securities, said, "The financial sector is going through a turmoil globally. This is being reflected in the Indian markets as well. The media reports about banks having taken a hit in derivatives transactions, have also rattled investors.''