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Investors bearish on banks on global credit woes

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MUMBAI: Investors, globally, are shying away from financial companies and the scenario is no different in India. Banks and financial shares have been the worst hit in the market meltdown.

In the past one week, BSE Bankex has tanked over 11 per cent. On Thursday alone, ICICI Bank fell as much as 14 percent to Rs 757.40, its lowest close in more than a year, on concerns about the bank's exposure to the derivatives market.

The country's second largest lender said its investment losses due to the unfolding global subprime crisis could wipe off up to 9 per cent of this year's profit. It would have to provide an additional $70 million in the March quarter for mark-to-market losses incurred by its overseas branches and subsidiaries on exposure to credit derivatives. The spreads have also widened further due to the continual impact of the sub-prime crisis.

Investors are wary of banks taking a huge hit on exposure to derivative structures like interest rate swaps.

An interest rate swap is a derivative in which one party exchanges a stream of interest payments for another party's stream of cash flows. Interest rate swaps can be used by hedgers to manage their fixed or floating assets and liabilities.

"As far as credit derivatives are concerned, other Indian banks do not have as much credit exposure as ICICI Bank. Most derivative instruments are in the form of interest rate swaps, which might be a cause for concern," said a banking analyst.

According to CLSA estimates, ICICI Bank has the maximum exposure to derivative structures among Indian banks, at $1.5 billion. Bank of India has an exposure to the tune of $750 million, Bank of Baroda $311 million and Axis Bank $150 million.

According to latest RBI data, the consolidated foreign claims or exposure of domestic banks on ultimate risk basis has increased by 41.16 per cent, from Rs 105,675 crore at end June 2006 to Rs 149,167 crore as at June 2007.

The consolidated contingent exposure of Indian banks arising from derivatives, guarantees and credit commitments has risen 79 per cent, 62.9 per cent and 101 per cent respectively in the same period.


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