MUMBAI: Traders mounted their bearish bets on ICICI Bank on Tuesday, taking cues from the plunge in its American Depository Receipt (ADR) the previous night, as they speculated that the private lender's bad loans may increase with the Indian economy weakening.
Short positions in ICICI Bank stock futures surged after the five-year credit-default swaps (CDS) on the lender rose 88 basis points to 483 points in a week--one of the fastest increases among Asian banks.
ICICI December stock futures, which closed at Rs 708 against the share price of Rs 709.30, added around 4,500 contracts in open interest. While the contract was trading at a premium of almost Rs 4 for most of the day, it slipped into a discount of Rs 1 at close. ICICI Bank shares hit a 52-week low of Rs 690.25 earlier in the day.
"It is the largest private sector bank and when sectors like power, infrastructure and aviation are stressed, it is bound to increase worries about asset quality," said Saday Sinha, analyst at Kotak Securities.
ICICI Bank's CDS —the cost of insuring debt of the lender against non-payment— is still 13 points away from the record level of 496 on October 10. The country's largest lender State Bank of India's CDS, which has risen 43 basis points to almost 370 points, is about 26 points away from the high of 396 in October.
Analysts said the sudden pessimism about ICICI Bank has resulted in traders incurring losses in a trading strategy involving SBI. Many derivatives traders have been selling SBI contracts and buying ICICI Bank contracts, as part of a pairtrade strategy. They expected SBI to outperform ICICI Bank.
"There have been renewed concerns over ICICI Bank, and this is unlike a few weeks ago when it was trading at comfortable levels. Its correlation with SBI futures has been disturbed," said a derivatives head of a Mumbai-based institutional brokerage, who declined to be named.
A recent study by IDBI Capital Market shows the estimated Corporate Debt Restructuring (CDR) referrals of ICICI Bank in the second quarter of 2011-12 was Rs 1,170 crore.
The percentage of ICICI's estimated CDR referrals to its cumulative restructured book was at 46.9% in the quarter, the brokerage said. In comparison, this ratio was 2.5% for SBI, with its estimated CDR referrals at Rs 900 crore.
The percentage of ICICI's estimated CDR referrals to its cumulative restructured book was at 46.9% in the quarter, the brokerage said. In comparison, this ratio was 2.5% for SBI, with its estimated CDR referrals at Rs 900 crore.
"Our estimated Q2FY12 CDR referral as a percentage of cumulative restructured assets for some of the banks is quite high. This estimated CDR amount is likely to have been referred in Q2FY12, so banks are staring at atleast this amount for conversion to either restructured assets or NPAs in coming quarters," said Sandeep Jain, analyst at IDBI Capital, in a client note.
Some analysts are less worried about the likelihood of the surge in bad debts of Indian banks. "There are asset quality issues and if people are worried about it, then it is rightly so. But, we are of the view that Indian banks, and especially ICICI, will manage these asset issues well.
Here, the question is whether there will be earnings growth or not," said Rajat Rajgarhia, head – institutional research at Motilal Oswal Financial.
