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Noticeably, in its October 2008 Performance Review, ICICI (IBN), India’s largest private bank, has not reconciled one key element included in its Credit Suisse (CS) - sponsored April 2008 analyst presentation: the size and health of India’s middle class. In actual fact, the key “consumption driver” (i.e. middle class income levels) contained in the April presentation has been totally impaired by recent events; and the robust GDP projections on which many of ICICI’s performance guidelines were predicated have already been revised sharply downwards by the Indian government itself.

Earlier this year, rumours relating to ICICI’s financial condition prompted a run on its deposits. Though the rumours themselves were proven to be unsubstantiated, they were triggered by genuine concerns. Very specifically, was ICICI’s public disclosure capturing the adverse impact of the fast-deteriorating domestic and global economic environment? And, was the criterion for determining loan-loss provisions in line with the rapidly changing reality governing family incomes and jobs?

At $17.50 (or higher) per ADR (each ADR is composed of two ordinary shares), ICICI Bank is a bellwether stock for investors who want to establish aggressive short positions (mid-2009 target below $10) on the emerging markets for several reasons. Primarily, despite the sharp fall from the 52-week high of $74.25, current ADR price levels do not fully incorporate extremely negative post-October economic statistics. ICICI’s critical consumption driver (driving housing, credit card and consumer loans) was based on the combined middle class and high income population exceeding 350 million in 2008 and 600 million by 2015; today, as we enter 2009, preliminary data suggests that India’s middle class is decisively shrinking, that loan defaults in the lower end of the middle class segment will reach alarming levels within weeks and that hundreds (if not thousands) of well-paying jobs are being lost every day.

In that, and in many other respects, ICICI will reflect, through the course of 2009, the fate of numerous emerging markets from which middle class consumption numbers were encouraging high equity values, high food prices and high energy demand in both the developing and the developed world; ICICI’s retail loan portfolio is about 55% of its total loan book. The other fact plaguing all emerging markets is the outdated methodology for credit delinquency provisions on bank balance sheets; as a review of ICICI’s audited financial results for the 6-month period ending September 30, 2008 shows, Reserve Bank of India (RBI, India’s central bank) guidelines for classifying standard, sub-standard and doubtful assets are influenced almost entirely by the number of days an account is overdue, and by the availability, or otherwise, of collateral which, in any event, is not subject to rigid independent scrutiny.

The RBI’s regulations are hopelessly out of tune with the times, an ailment which is common to economies like China, Turkey, Brazil and Russia. For example, the RBI calls for a provision of a mere 10% on sub-standard assets, a phased year-by-year write-off schedule for doubtful assets, and a generous accommodation for “restructured” loans. So while ICICI may well not qualify as a healthy bank by US standards, domestic delinquency provision guidelines will continue to provide the aura of viability. Until, of course, the deepening economic crisis creates an unmanageable liquidity crunch. ICICI’s claim that its asset identification strategy falls in line with FSAS 157 fair value measurements is without foundation.

Not to be outdone by its Wall Street’s counterparts, ICICI’s derivatives exposure is nearly $300 billion, much of it in illiquid far-forward interest rate and currency markets; exposure to credit derivatives, including credit default swaps and collateralized debt obligations, both funded and unfunded, is $1.75 billion.

To provide another perspective, the 5-year CDS spread for ICICI was last quoted at 875-925 basis points (down from a record 1800 bps on October 27) and ICICI’s long-term S&P rating (foreign currency) is "BBB-"; both indicators confirm the viewpoint that the ICICI ADR is indeed an emerging market bellwether.

Disclosure: Author holds a short position in IBN

Source: ICICI Bank: Bellwether Emerging Market Short