Amid a choppy international market, the country's second-largest bank, ICICI, has pared a slice of its volatile, high-risk exposure. The bank has sold about $275 million from its credit derivative portfolio in its foreign branches. The transaction, closed a few weeks ago, will enable ICICI Bank to cut its mark-to-market losses (which arise when market prices of securities held in the bank's books dip).So they've sold off some CDOs. Interesting. This is not a huge change as they've already written down some amount earlier. But earlier they were confident of the credit quality - now it seems they are not.However, the bank has decided to retain the credit derivatives where the underlying loans are to Indian companies.
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According to ICICI Bank's balance sheet for last year, it had a total credit derivative exposure of $1.6 billion. This included various instruments like credit default swaps (CDS), credit linked notes (CLN) and collateralised debt obligations (CDO)-derivatives where the underlying is plain vanilla loans. (Loans are packaged into various marketable securities like CDO and CLN, and there are deals in which a second bank sells a default protection to the original lender. These protections are like insurance premium and the product is called CDS). The recent sale pertains to CDOs.
But they're still confident of the Tatas and Bharat Forge. Will that be vindicated? Will the global credit squeeze and recession impact the creditworthiness of the Indian Giants? (Who, it must be said, aren't giants compared to the likes of Bear Stearns) Time will tell.
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