ICICI Bank: Over Rs 3000 Crore Exposure in Maytas?

This is an SMS that I got from a VP of a top brokerage house in India:

"Banking sources say ICICI Bank has the largest exposure of over Rs 3000 crore mostly in guarantees for Maytas Infrastructure assuming timely completion of projects it bagged. Work on these projects is said to have come to a standstill for want of working capital. Take care if you hold ICICI."

If this is what a majority of the market gets to hear by Monday, then GOD help the ICICI stock. Only the next few days will tell whether this is a rumor or a fact.

ICICI Stock Price: A Quantitative Aspect

The graph below shows the trench between the Standard Deviation of the opening price of ICICI stock on 8th of every month and the closing price for the 10th of next month for 16 such successive periods. If the fall in the ICICI stock between 8th September, 2008 and 10th October 2008 was indeed abnormal, then the trench for that period (T2: at -13.03) should be the largest, but the graph shows that the deepest trench between the SDs was in the period T7, sometime close to January 2008. The numbers and data suggest that the SD seen in the ICICI stock prices and the trenches are not abnormal during the current year and have in fact been lesser that previous monthly averages. Thus the idea of rumors causing its stock to sink by 50% does not quite seem logical to me. But then again, this is purely based on the movement in stock prices.

ICICI Rumors: "Rumors" - Thats What They Are..

How much damage can someone's word cause? I would say significant, especially with negative market sentiments, just a small push can be reason enough for panicky investors to sell. This push comes in the form of false rumors or negative news injected. Often such news is baseless and a result of word or mouth conversations. But the kind of damage this can cause is realistic.

Rumors of ICICI Bank expected to book huge losses due to forex derivatives and exposure to Lehman Brothers resulted in the banks market cap being eroded by more than 11% in a single day. Customers started panicking and rushed to their nearest ATM to withdraw cash and many rushed to the bank demanding closure of their accounts and withdrawal of all their funds.

I don't blame retail customers and investors for the way they react to such news. In the past 2 hours at least 7 of my colleagues who happen to be rationally thinking management students, have come to me to tell me that ICICI Bank has gone bankrupt. My response to them was a smile. If a management student can buy such news and not even bother looking at the bank's asset base first or cross check the information, then you can very well imagine how a common man would react.

Edleweiss Capital Research which came out with a statement on 16th September that ICICI Bank is expected to book a Mark To Market losses of $200 million, today put a BUY call on ICICI. This is just another example of how news driven the approach to investments is today. Such a statement coming from am equity research company like Edelweiss is disappointing.

Some facts about ICICI Bank:

The proposed MTM loss of $200 million (assuming that it happens) would come close to Rs 940 crore. ICICI's Adjusted Net Profit for year ended March 2008 stood at Rs 4,112.50 crores.

ICICI's total assets stand at Rs 400,417 crores and its Interest Income stands at Rs 30788 crores

Source: www.capitaline.com

So the next time before buying a hoax, go and check it first.