UBS'' Subprime Report Lets ICICI Scrip Down

The report by UBS Securies, which said ICICI Bank is exposed to the US subprime market, which pushed down the scrip 1.9%, was later changed by UBS to simply state that ICICI has a Rs 1,800-crore exposure to the CDO market. CDO or collateralised debt obligation are asset-backed securities, and such assets could be any loans, not necessarily retail (or subprime). Several Indian corporates have issued bonds overseas to fund cross-border M&As as well as local expansion. In CDS or credit default swaps, the bond investor pays a premium to the swap seller against default risk. CDS are tradeable products, and are subject to market to market gains or losses. UBS Securities India, the broking arm of Swiss financial services group UBS, also said the country''s biggest bank, SBI, may face the heat of the subprime shakeout. However, SBI chief general manger (foreign offices) TCA Ranganathan clarified that the bank has no exposure to the US retail mortgage market. The second report, released soon after the first, said the bank has an exposure to CDO. The SBI scrip was unruffled by the news, and even rose marginally during the day.

The subprime market is comprised of retail loans given to troubled borrowers, many of whom have defaulted in recent months as property prices softened and overspending took its toll. Since such subprime loan pools are securitised (chopped into smaller securities), institutional investors like hedge funds, pension funds and banks which buy these securities also take a hit when borrowers default. ICICI Bank has a total CDO exposure of Rs 6,000 crore (2% of the bank''s total balance sheet size), of which 30% is international. Prices of CDS for most Indian companies have nearly doubled over the past one month because of the subprime tremor in the US market.