'Post-Brexit, banks need understand currency volatility risks'

Even though Indian commercial banks' shares have moved higher. ignoring Brexit (Britain exiting European Union), the currency volatility risks have to be understood, said US investment banking firm Jefferies in a report.

Banks need to make provisions for their exposures to corporate with unhedged foreign currency exposure (UFC) and additional capital buffer for high risk UFCEs, the report said.

Jefferies estimate the risk exposure at 1.7 per cent of gross credit exposure for banking system. Banks have built Rs 13 billion in provisions and Rs 29 billion in additional capital as of FY16.

According to the report, Bank of Baroda (BOB) is the only to report Liquidity Coverage Ratio (LCR) in British pound implying five per cent plus of liability in that currency.

"This may result in higher hedge costs going forward -- marginal NIM (net interest margin) negative. This of course depends on the currency composition on the asset side -- unfortunately we don't have sufficient public data to delve deeper," the report said.

According to the report, ICICI Bank (UK), 100 per cent subsidiary of ICICI Bank may have limited first order impact with British pound denominated liability exceeding British pound denominated assets with LCR exceeding 80 per cent.

"Its interbank exposure to the UK domiciled bank has also declined to 9 per cent vs 14 per cent last year -- although we suspect liquidity risks won't arise with prompt central bank actions. That said, currency risks channelised via asset quality is hard to quantify at this stage. We think the UK subsidiary's performance will continue to be weak," the report said.

--IANS

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