ICICI Bank : Provisioning blues

Amount of exposure higher than expected.

ICICI Bank will be providing about approximately $260 million in FY08 for mark-to-market (m-t-m) losses on its $2 billion credit derivatives exposure and also for the $4 billion investment portfolio of its subsidiaries in the UK and Canada.

What seems to have taken an already nervous street by surprise is the quantum of the total exposure, which is in the region of $6 billion and was perceived to be lower.

That's one reason why the stock tanked in intra-day trades on Tuesday but recovered to close just 5 per cent lower. On Wednesday, the stock lost another per cent closing at Rs 960.

The m-t-m losses on the credit derivatives could shave off 5-7 per cent from the FY08 earnings of India's second largest bank which posted a net profit of Rs 3,110 crore in FY07 and is estimated to up that by about 35 per cent to Rs ,4200 crore in FY08.

The bank has already provided for $190 million and will provide the remaining $70 million in the March 2008 quarter. About $65 million of the total provisions will be made through the reserves while the remaining amount will be provided through the P&L account.

The investment portfolio in the subsidiaries comprises primarily investment-grade bonds which are held to comply with regulatory norms in those countries. Thanks to the widening credit spreads, ICICI bank has had to take a hit of about $105 million.

The credit derivatives comprise collateralised debt obligations and other products. While the underlying credit quality remains strong, which means that over time these investments could regain their value, there is always the risk that credit market conditions continue to deteriorate.

Both subsidiaries are wholly-owned and over a longer term may need to be capitalised. The bank will also need to capitalise its insurance subsidiaries since it has not yet been able to create a holding company structure to raise resources, unless it comes up with an alternative.

At the current price of Rs 960, the bank trades at around 2.2 times price to FY09book value and is cheaper than its peers like HDFC Bank. From these levels the stock should outperform.

REL : Buyback good for shareholders

The maximum price of 1,600 at which Reliance Energy (REL) will buy back its shares is at a 10 per cent premium to the closing price of the stock on Wednesday of Rs 1459.50.

Since the announcement on February 26, that the REL board would meet to consider a buy back, the stock has lost 14 per cent. At the current price, the stock trades at approximately 31 times FY09 estimated earnings, while peer player Tata Power, at Rs 1197, trades at a multiple of 33 times.

With Reliance Power (RPL)now the key vehicle for adding generation capacity, REL's portfolio will include its generation business ( which includes the Mumbai license area), the EPC business and the Mumbai and Delhi distribution businesses and several large infrastructure projects.

Revenues from these infrastructure projects could, however, take time to flow in, point out analysts. RPL plans set up power projects with a total capacity of nearly 28, 200mw. However, these are long gestation projects and the supplies of gas for some of the power plants are yet to be tied up.

In FY07,Reliance Energy's total operational income grew 42.4 per cent to Rs 5693 crore. However, other income at Rs 887 crore accounted a fairly large part of the profit before tax of Rs 872.37 crore. In FY06, too the other income stood at Rs 609.56 crore as compared to the profit before tax of Rs 781.47 crore.

The buy back will no doubt provide some support for the stock. However, given the fairly expensive valuations for REL, investors may want to consider opting for the buy-back offer.

This is not the first time REL has announced a buy-back of its shares -- in June 2004, the firm said it would buy share up to a maximum price of Rs. 525 per share for an aggregate amount of Rs. 350 crore but no shares were bought.