Emerging markets are typically something of an exotic afterthought in the financial press. When things in the home market are dull, suddenly reporters are sent all over the globe to interview the "Indian Warren Buffett" or the "Chilean George Soros".

On the other hand, when times get tough back at home, these once-hot markets are largely forgotten. So, while the American news media has been following the travails of Goldman Sachs (NYSE:GS), Citigroup (NYSE:C), Wachovia (NYSE:WB), and the like with rapt attention, the banking problems in the rest of the world have received less ink.

When you look at the earnings report from India's ICICI Bank (NYSE:IBN), though, it's pretty clear that the credit crisis is not only an American or Western phenomenon.

The Tangled Details
ICICI Bank's income statement highlights one of the problems of bank stocks; it can be something of a challenge to figure out what the heck is actually going on. For instance, net interest income was up 20% this quarter and that sounds great, but interest earned was up by a less-impressive 4%. Likewise, operating expenses fell 12% (and that's good), but the cost of non-performing assets jumped. All in all, net income rose by 1% from the year-ago period; mediocre in a normal environment, but maybe not so bad in the middle of a bank industry meltdown. (Discover how to evaluate financial institutions in Analyzing A Bank's Financial Statements.)

Looking elsewhere, loans were up 7% as the company balanced good growth in non-retail lending (up 31%) and international lending (up 56%) with a 6% drop in retail lending (with mortgage lending down 5%). On the other side, deposits fell by 2% from the year-ago level. The company ended this quarter with a loan-deposit ratio of close to 100%.

Enter the Crisis
ICICI Bank has definitely seen the same sorts of problems as other banks around the world. Consumer lending exploded in India and delinquencies are starting to rise, bad news for providers like ICICI, Citigroup, HSBC (NYSE:HBC) and HDFC Bank (NYSE:HDB). Likewise, investors have started to worry about the bank's investments; the company had only a small exposure to Lehman Brothers, but that hasn't stopped worries about exposure to other entities like AIG (NYSE:AIG).

You can see the concern investors have about ICICI Bank in the cost of its credit default swaps (CDS). CDS spreads were below 100 for most of 2007, but hit 300 during the summer. Recently, the spreads exceed 1,600, and that represents an incredible jump in the cost of external financing for ICICI. With credit losses rising and deposits shrinking, that's a danger, even if some of the increase is due to a global freeze-up in credit availability and risk appetite. (For an easy to understand explanation on how these swaps work, read The Barnyard Basics of Derivatives.)

A Real Opportunity, With Real Risks
I like to value bank stocks, in part, on the basis of a model that uses return on equity (ROE) as the primary driver. Using that model, it appears that as long ICICI can achieve a long-term ROE of 12% (or better), the stock is undervalued today by at least a double-digit percentage amount.

Now, I think the current consensus target price (as calculated by Yahoo Finance) of $48 is a little naive and overheated, but I do see long-term potential here. Investors should realize, though, that the recession and credit crunch aren't over yet, and another bad day or two could see this stock down retesting its lows. If you can live with that volatility, then there's a lot to like in one of India's largest banking franchises.

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