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Monday, January 7, 2008

Subprime crisis to hit 4 big banks` profits

SBI, ICICI, BoB, BoI to book losses on credit derivatives.

State Bank of India (SBI), ICICI Bank, Bank of Baroda (BoB) and Bank of India (BoI) are set to book mark-to-market losses on the exposures of their foreign offices to credit derivatives, with the spreads on these widening since international lenders turned risk-averse following the crisis in the US subprime (or high-risk home loan) market.

Credit derivatives are instruments for which the underlying asset is a loan or a bond. Marking to market means valuing a portfolio based on the prevailing market price.

The significance of this move is that the net profits of the four Indian banks would be dented for the third quarter ended December 31, 2007, to the extent of the provisions that they decide to make.

ICICI Bank, the country’s second largest bank, has the highest exposure of $1.5 billion (approximately Rs 6,000 crore). SBI, the country’s largest bank, has an estimated exposure of $1 billion (Rs 4,000 crore), BoI $300 million (Rs 1,200 crore) and BoB $150 million (Rs 600 crore).

The mark-to-market losses on these credit derivatives portfolios could range from 5 to 10 per cent. Though these over-the-counter exposures are not required to be marked to market by regulations, banks have been making provisions for them globally.

All four banks have already made provisioning on account of marking-to-market credit derivatives for the quarter ended September 2007.

A senior ICICI Bank official said: “We made a provisioning of Rs 100 crore in the quarter ended September 30, 2007. However, this impact was offset by other treasury income of Rs 300 crore to Rs 400 crore.”

Close to 70 per cent of ICICI Bank’s exposure to credit derivatives is to Indian corporations, while the remaining is to foreign companies.

For the second quarter of 2007-08 for mark-to-market losses on these exposures, BoB provided around $16 million (or close to Rs 60 crore) and BoI Rs 5 crore to Rs 6 crore.

SBI did not respond to e-mail queries sent to the bank’s chairman on the bank’s exact exposure and provisioning requirements.

A BoB official said: “For the December quarter, the additional provisioning would be nominal; maybe a couple of millions more.”

The Reserve Bank of India, in its latest progress report on banking in India, noted that some Indian banks with overseas operations do have some exposure to credit derivatives and there could be some losses due to mark-to-market impact.

However, it said such exposure was “very limited” and that banks did not have any direct exposure to the US subprime market, it said.

The main variants of credit derivatives include collateralised debt obligations (CDOs) and credit default swaps (CDS).

CDOs are securities backed by pools of other securities and bought by investors wanting exposure to the income from a set of loans or bonds but not direct exposure to them.

CDS is an agreement whereby a lender transfers a credit risk to a counter-party (say, another bank), which agrees to insure the risk and receives periodic payments like an insurance premium.

If the lender’s client (borrower) defaults, then the counter-party to the CDS agreement pays the lender the outstanding principal and any remaining interest and buys the defaulted asset.

Posted by Srivatsan at 7:50 AM

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Understanding Short Term Trading

Before I begin, this blog is not for intraday traders. My definition of short term implies duration of around 2 to 3 months.

Short Term stock picking is no rocket science, but rather a visual interpretation of technical charts. A basic moving average on a time frame chart will show the direction of the securities movement.

Moving averages is a mathematical results calculated by averaging a number of past data points. Moving averages (MA) in it's basic form is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. Once the value of MA has been calculated, they are plotted onto a chart and then connected to create a moving average line. Typical moving averages used for short term trading are 50 MA and 100 MA.

Types of Moving Averages

1) Simple Moving Average (SMA)

SMA is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. The usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. Critics argue that the most recent data is more significant than the older data and should have a greater influence on the final result.

2) Exponential Moving Average (EMA)

EMA overcomes the limits of SMA, where more weight is given to the recent prices in an attempt to make it more responsive to new information. When calculating the first point of the EMA, we may notice that there is no value available to use as the previous EMA. This small problem can be solved by starting the calculation with a simple moving average and continuing on with calculating the EMA.

The primary functions of a moving average is to identify trends and reversals, measure the strength of an asset's momentum and determine potential areas where an asset will find support or resistance. Moving averages are lagging indicator, which means they do not predict new trend, but confirm trends once they have been established.

A stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a downtrend. Many traders will only consider holding a long position in an asset when the price is trading above a moving average.

In general, short-term momentum can be gauged by looking at moving averages that focus on time periods of 50 days or less. Looking at moving averages that are created with a period of 50 to 100 days is generally regarded as a good measure of medium-term momentum. Finally, any moving average that uses 100 days or more in the calculation can be used as a measure of long-term momentum.

Support, resistence and stoploss can be infered by referring the closet MA below or above the market price. The other factor that is used in short term momentum is the trading volume. The moving averages along with the trading volume can provide a better insight to short term movement.

Markets are moved by their largest participants - I believe this is the single most important principle in short-term trading. Accordingly, I track the presence of large traders by determining how much volume is in the market and how that compares to average. Because volume correlates very highly with volatility, the market's relative volume helps you determine the amount of movement likely at any given time frame--and it helps you handicap the odds of trending vs. remaining slow and range bound.