LIC unlikely to gain much from IDBI Bank deal

LIC Representational image | Reuters

The Life Insurance Corporation of India's plans to increase its stake in the state-owned IDBI Bank have raised quite a few eyebrows in recent days. The biggest issue that crops up is that the country's largest insurer is picking up a stake in one of the worst performing banks. Experts say LIC is hardly going to gain any advantage from this investment, but it could give a huge lifeline for the ailing IDBI Bank and address some of its capital requirements.

LIC already holds around 11 per cent stake in the state-owned lender. The Insurance Regulatory Development of India (IRDAI) on June 29 had allowed the state-owned life insurance giant to increase its stake in IDBI Bank. Under the proposal, LIC could raise its stake to about 51 per cent, and will have to inject over Rs 10,000 crore in the bank, according to market men.

IDBI Bank could undoubtedly be the biggest beneficiary of this deal. The lender, hit by huge non-performing assets and higher provisions for the same, reported a net loss of Rs 8,238 crore in the year-ended March 31, 2018. This was higher than the net loss of Rs 5,158 crore in the previous financial year.

As of March 31, IDBI Bank's gross non-performing assets stood at a whopping 27.95 per cent (Rs 55,588 crore). Net NPAs were at 16.69 per cent (Rs 28,665 crore). Its provisions for the January-March quarter stood at Rs 10,544 crore and its capital adequacy ratio under Basel III norms stood at 10.41 per cent versus 11.93 per cent in the year ago quarter.

The lender has already been under the Reserve Bank of India's prompt corrective action watchlist since last year. So this deal will give it much needed capital.

“Capital is something IDBI had very much required. The capital adequacy concerns are now addressed with LIC coming into play,” said a senior analyst at a domestic broking firm.

However, he remains skeptical whether this will address the asset quality issues of the lender.

Also, by bringing in LIC as an investor in IDBI Bank, the government could also benefit to the extent that it would not have to provide the bank with the capital requirements now, and in turn that much amount could be diverted to other state-owned lenders in need.

According to an analyst at a credit ratings agency, on a proportionate basis IDBI Bank needed among the highest amount of capital, and this deal will sort that out to an extent.

“Some hand holding was required, what better than a sovereign like LIC. What ever the government had to give IDBI, it no more has to give and you free up that kitty to provide to others,” said the analyst.

The broking analyst cited earlier, feels that the government could have been better-off by selling off the bank or bringing in an private equity investor. However, given the scale of the NPAs, finding a buyer for IDBI Bank would have been difficult and valuations would have been a concern too, he added.

India Ratings and Research last month downgraded IDBI Bank's long-term issuer rating to 'Ind AA-' from 'Ind AA' and the outlook was negative.

“The downgrade reflects the impairment in IDBI's ability to sustain its current position of systemic importance, with a dip in its overall share of systemic assets and liabilities, mirroring the sharp deterioration in its asset quality,” it said, adding that the lender “would continue to grapple with a weak capital profile.”

Another credit ratings agency ICRA says the change in ownership is unlikely to have any significant implication on the credit profile of IDBI as the existing ratings factor in the sovereign support.

“Acquisition of stake by LIC, with equally strong ability to infuse capital, is unlikely to drive the credit profile in near term till there is an improvement in the standalone profile of the bank,” ICRA said.

It believes the deal could be done under the policyholder's accounts of LIC and hence even a 51 per cent stake in IDBI Bank will not make it a subsidiary of LIC.

Many see this as a clear bailout of the distressed lender by LIC, and the insurer is unlikely to gain any advantage. Rather, the lender would continue to require more capital if slippages increase as its common equity tier 1 (CET 1) ratio stood at 7.42 per cent at the end of March, barely above the required 7.37 per cent.

“As far as the asset quality issues at IDBI Bank go, it would take at least six to eight quarters. I don't see any major improvement before that,” said the analyst at the ratings agency.

LIC employee unions also have questioned the insurer's motive of investing in a bank with huge NPAs, according to a PTI report.

“There is a considerable erosion in the share value of these banks, which may affect our profitability also,” said Federation of LIC Class-I Officers Association, citing past performance of investments made in state-owned banks.

Political parties too have criticised the move.

“LIC is the repository of people’s savings in the form of insurance policies. Using this capital to bailout the worst defaulter bank is tantamount to public loot of people’s savings. Instead of recovering the loans from the defaulters, they are being bailed out by people’s savings deposited in insurance policies,” the CPI(M) said.

But, analysts point out that LIC has invested in public sector undertakings in the past too and given its investments are largely for the long-term, it was unlikely to exit investments at a loss.

In the last financial year, LIC's profits from sale investments alone stood at around Rs 28,500 crore. Given the size and scale of the insurance giant, this investment in IDBI Bank is unlikely to materially impact it in a big way in the near-term, they add.

Ratings agencies say more clarity on the structure of the deal was needed to ascertain the longer term impact of the deal on the lender.