BL Research Bureau

Bailing out IDBI Bank has cost Life Insurance Corporation (LIC) very dear. The massive ₹21,624 crore of capital that LIC infused into the ailing bank last fiscal, has been sucked into the bank’s losses.

What’s more, the bank’s bad loan troubles don’t appear to be easing any time soon. In the latest June quarter the bank’s CET 1 (Common Equity Tier-1) ratio and Tier-I ratio has slipped to a precarious 5.9 per cent (as against regulatory requirement of 7.375 per cent) and 6.1 per cent (8.875 per cent) respectively.

The bank will soon have to come knocking on LIC’s door to infuse more capital.

LIC, which acquired a controlling 51 per cent stake in IDBI Bank, has already seen its investment erode by more than half — the insurer had been allotted shares in the bank at a price of 60-61 per share; the stock price has plunged to ₹27 since then.

The latest June quarter numbers suggest that the worst is not over for IDBI Bank, with bad loan provisioning continuing to eat into its capital. The stock has fallen by 9 per cent today

The question is: how long can LIC, the knight in shining armour, come to the rescue of the ailing bank?

Not a pretty picture

IDBI Bank, which has been reporting losses for the past four fiscal years, reported another loss in this quarter. The bank’s bad loans have grown by more than four times over the past five years, leading to huge losses. Bad loan provisioning in the June quarter remained elevated at ₹7009 crore, leading to a loss of ₹3801 crore for the quarter. The bad loans for the bank is a huge ₹51,658 crore (against market cap of just ₹19,000 crore!), forming 29 per cent of the bank’s loans (up from 27 per cent in March quarter).

Also read:IDBI Bank loss widens to ₹3,801 cr

In the June quarter, fresh slippages shot up to ₹3,486 crore from ₹1,781 crore in the March quarter.

The bank’s SMA book (special mention accounts where payments are overdue by 1-90 days) has risen too. From ₹7,343 crore in the March quarter, the SMA book has gone upto ₹10,272 crore, implying persisting stress in the bank’s books, which can continue to keep slippages and bad loan provisioning elevated in the coming quarters.

This essentially implies that there is more stress on the bank’s capital, and hence there is a need for more capital infusion in the current fiscal.

The bank’s capital ratio has weakened in the June quarter, despite the fall in its risk-weighted assets (RWAs). The RBI assigns different ‘risk weights’ to different types of loans based on the risk — higher the risk of defaults, higher the risk-weight. Capital ratios for banks are determined with RWA as denominator and hence a decrease in RWAs should ease up capital.

But for IDBI Bank, despite its risk-weighted assets falling by 7 per cent in the June quarter (from March quarter), capital ratios have slipped, owing to losses.

This is a cause for concern, as it indicates that the bank is unable to check its bad loans, despite bringing down its risky exposures. As such, the bank’s weak core performance is worrisome. IDBI Bank’s loans shrunk by 6 per cent in the June quarter, with its corporate book declining by 14 per cent, while retail loans growing by a meagre 4 per cent. The bank’s net interest income fell by 11 per cent.

PCA status

The RBI had initiated Prompt Corrective Action (PCA) on banks in 2017, owing to its high net NPAs and negative return on assets (ROA). The PCA framework deems banks as risky if they slip below certain norms on three parameters — capital ratios, asset quality, leverage and profitability. It has three risk threshold levels (1 being the lowest and 3 the highest) based on where a bank stands on these ratios.

As of June quarter, IDBI Bank continues to fall within the three risk threshold levels across various parameters. Continued restrictions on credit and other activities, is likely to keep the bank’s core earnings under pressure. If slippages continue to rise, losses could persist and eat into the bank’s capital.

Non-core investments

The bank has been offloading some of its own non-core investments, to fund its losses. In FY18, the bank had sold its entire 30 per cent stake in NSDL e-governance Infrastructure (NEGIL). The bank had also sold some of its stake in NSDL (National Securities Depository Ltd). It holds 26 per cent stake in NSDL as of March 2019.

IDBI Bank has other non-core investments as well — IDBI Federal Life Insurance (48 per cent) and IDBI AMC (66.7 per cent) — among the key ones.

After 3 per cent fall in premium (first-year preimum) in FY19, IDBI Federal Life Insurance reported a decline of 15 per cent in premium in the June quarter, according to data put out by IRDAI. Its share amongst private players is under 1 per cent. IDBI AMC also ranks low among the fund houses in terms of assets under management (AUM). Weak market share may weigh on the valuation of these businesses.

Hence while offloading some of its non-core investments can help, IDBI Bank will still have to largely rely on LIC to for its capital needs.