ICICI Bank – Markets react excessively

Markets reacted to the news flash from CNBC-TV18 on the mark to market losses set off by ICICI Bank as if it was a bolt from the blue. Stock was down 9% immediately after the news broke and was significantly down even after the management clarified the situation (though not coherently) closing the day with a loss of over 5%. Even though most of them did not cover this subject in their Q3 earnings reports, the brokerages came out with reports the next day and made it look as a harmless piece of information known to all Toms and all Harrys in the market. But the fact is, the market wisdom was more confused than ignorant of the exposure of the bank in the international markets right from the beginning. Thus reminding all of us that “Markets react. Markets react excessively.”

Markets believed that the bank had exposure of $1.6bn when infact it has $5.9bn. The losses were also ambiguous before the expose. This information asymmetry is what markets reacted to.

Should there be a reason for long term investors of the stock to worry? The credit derivatives subscribed to are from Indian corporates who are not exposed to sub prime crisis in US directly. Also, the investments in UK and Canadian subsidiaries are predominantly in corporate bonds and remaining in government treasuries. More than 85% of these are rated ‘A’ and above. The icing on the cake is that is if these are held to maturity, the write off amounts to the most part may be written back.

Is it a good time to enter? Here is a perspective. The writedowns of $265mn in this financial year works to only Rs7 per share. Not a significant impact. Consider this: For the entire 12 month target price from different brokerages are listed below. The average target price is Rs 1504. Assuming that the foreign subsidiaries would have funding pressure going forward because of liquidity concern in the world and considering no contribution to the bottomline, the target price comes to Rs 1430. This is 60% premium to the current market price of Rs 894. 60% return in 12 months considering worst case scenario!
Citigroup-Rs 1510
JP Morgan-Rs 1628
Merrill Lynch-Rs 1450
Motilal Oswal-Rs 1416
UBS-Rs 1515