LIC deal may be a game changer for IDBI Bank; capital adequacy to get boost

Although the IDBI Bank (IDBI)-Life Insurance Corporation of India (LIC) deal may not be a positive one for the insurer, it comes as a breather for the ailing public sector bank. 

The results are already showing. IDBI’s stock surged about 12 per cent during Friday’s trading session with an expected nod from the Insurance Regulatory and Development Authority of India (IRDAI) to LIC for 51 per cent stake in the bank. The green light finally came after market hours. 

What made investors regain confidence in IDBI is capital strengthening. 

IDBI’s mammoth pool of non-performing assets (NPAs) left it in deep waters with its net NPAs 1.4 times of the book value as of March 2018 and 1.2 times its market capitalisation as on June 29, 2018. This means shareholders’ value will get wiped out if IDBI writes off its entire net NPAs.

But LIC’s capital infusion is temporary though. LIC will have to reduce its stake to 15 per cent in five-seven years and this would ease its pain. 

“This deal will help IDBI to come out of the stressed scenario (high NPAs). This, along with an expected government infusion, would help the bank deliver good returns,” said Asutosh Kumar Misra, analyst at Reliance Securities. This is also supported by the bank’s non-core asset selling. IDBI is likely to sell partial stake in IDBI Asset Management.

The bank would also be in a position to achieve its Basel-III capital adequacy requirements. IDBI’s total capital adequacy ratio (including capital conservation buffer), as of March 2018, stood at 10.4 per cent, below the minimum requirement of 11.5 per cent. Even if LIC puts in Rs 100 billion, IDBI’s capital adequacy would improve to about 15 per cent, keeping risk-weighted assets at the March 2018 level.

But the investments by LIC warrant book value dilution. “The capital infusion is likely to be below IDBI’s current book value multiple, resulting in book value dilution and lowering of its price-to-book value ratio. But this deal is not important from the valuation perspective but from the bank’s overall operational performance,” Misra added.

Although the government is unlikely to be a majority stake holder in the bank post this deal, experts do not see this as a serious concern. “Since LIC is also a public-sector organisation, it doesn’t make a lot of difference whether the government holds majority stake or not,” said Dhananjay Sinha, head – institutional research, economist and strategist at Emkay Global Financial Services. 

The capital indeed helps IDBI meet regulatory norms (Basel lll capital requirements). But that provides only limited support to run operations. The bank is already under the prompt corrective plan. Having a managing director and chief executive officer (MD & CEO) with three-month tenure is hardly a way to give the bank any confidence.

B Sriram has taken a charge as MD & CEO on Saturday to succeed MK Jain, who moved to the Reserve Bank of India (RBI) as deputy governor.  

“In critical times such as these, the need is for a leader with long-term tenure. There is turnaround plan which the bank is already executing but it needs steering which is not possible without certainty at the top,” said senior public sector bank executives, including one from IDBI.

Moreover, the morale of bank staff and officers is low since wage settlement is pending for over five years. The arrest of former IDBI employees in the Kingfisher Airlines loan case had made the staff apprehensive about taking decisions. Such issues have to be dealt in a deft manner for which a man at at the helm is required.

Jain had started implementing the bank’s turnaround plan with the hope that things will improve after FY20. That work needs continuity while recovery from big-ticket accounts stays on course.

Booster dose

  • Deal will protect shareholders’ value
  • Can improve earnings
  • Capital adequacy to get a boost
  • Unfavourable-valuation is not less important for now

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