Disinvestment: Will IDBI Bank find any takers?

It was in Budget 2021 that the Government of India announced its intent to exit its holdings in IDBI Bank. While it did create a lot of buzz back then, there’s been constant opposition from the bank’s unions. Is the bank financially healthy enough financially to evoke investor interest?

At 20.56 per cent gross non-performing assets (NPA) in the December quarter of FY22 (Q3), down from 31.78 per cent in Q2 FY19 when LIC infused capital into the bank, much of the ground work seems to have been done. So, when the government floats the expression of interest (EoI, due since October last year) in a few weeks, can it generate enough interest?

To save the banking system, the Reserve Bank of India (RBI) has made several exceptions, especially in the last decade. Reviving IDBI Bank was a similar case when it permitted Life Insurance Corporation of India (LIC) to take 51 per cent stake in the bank for ₹21,600 crore in 2018. IDBI Bank’s stake was valued at an average of ₹61 per share. In 2019, it infused an additional ₹4,800 crore, primarily for writing off bad loans. But since then, IDBI Bank’s risk management and underwriting practices have also been significantly overhauled.

In fact, last year, as a preparation to the government’s stake sale, a thorough audit of the bank’s books was conducted by KPMG, which helped take stock of the impending pain in its loan book and assess the potential impact due to the pandemic. Now, with the National Asser Reconstruction Company Limited (NARCL) set up, the bank expects ₹12,000 crore of loans to be hived off, which should further help reduce its gross NPA to 14-15 per cent.

At 97.1 per cent provision coverage ratio, IDBI Bank’s dud loans are almost fully provided. What’s more, with the bank exiting the RBI’s prompt corrective framework last year, the focus is gradually shifting from cleaning up its loan book to growing the book. As with the sector, IDBI Bank’s focus is also on the retail segment, the share of which in the loan book has increased from 27 per cent in FY18 to 37 per cent in Q3 FY22.

In the home-loan space, IDBI Bank is neck-and-neck with competition, doling out these loans at 6.75 per cent. Yet, despite much progress, IDBI Bank’s shares trade at ₹43 per share or less just around 0.5x price-to-book value and at a discount to LIC’s buying price.

Therefore, despite the improvements, the market perception of IDBI Bank is rather weak. Can it generate the right interest?

Finding a buyer

What is economical – the cost of starting a bank greenfield or acquiring a distressed one with operating practices lagging the industry standards? This is the challenge for potential investors of IDBI Bank.

Until a decade ago, bank licences were a prized possession. So, it made sense to bail out or take over a stressed bank even at premium. But things have changed.

The last time when a bank under extreme stress found a strong buyer was Catholic Syrian Bank, now rebranded as CSB Bank. While there’s more ground to clear, the initial verdict is that Fairfax helped CSB stage a turnaround. IDBI Bank’s case is a bit different.

LIC, to an extent, has done what Fairfax is doing at CSB. IDBI Bank now needs an investor who is willing to open the purse to not just clean up books, but also entirely revamp operations, bring in new resources (people and technology) with diverse skill sets, and set out a long-term business vision for the bank. In other words, make it a truly private bank. Cases such as YES Bank and Lakshmi Vilas Bank suggest that there could be fewer takers for distressed assets. Considering that bank licences are available on-tap, greenfield entry means less baggage (if not more economical) than brownfield penetration into the banking sector. On-tap universal bank licence norms opened in August 2016, by which time Fairfax had already started talks with CSB. If Fairfax had to take a decision today, the outcome may be different.

It is equally important to note that post Lehman collapse, foreign money has been flowing in quite selectively into India. In fact, big names such as Citi and HSBC remain evasive about converting their operations into subsidiaries (from branches), while large funds such as Temasek and Warburg Pincus already have their hands full with DBS India and IDFC First Bank. Therefore, there is a vacuum as to who of deep pockets who would be willing to dispassionately look at Indian banks.

But does that mean the government throwing a ball against the wall. Not quite.

Assessing the strengths

Incorporated as a development financial institution in 1964, Industrial Development Bank of India was converted into a bank in 2004. It was a leading player in the corporate credit space. “If there was someone who commanded as much respect as SBI in any consortium, it was IDBI Bank till 2012,” said a banker who didn’t want to be named.

From home loans to ATM cards, IDBI Bank was ahead of the curve even on the retail side. But, from 2014, the bank fell like ninepins and had to be rescued by LIC in 2018. Interestingly, after LIC taking the promoter’s tag, IDBI Bank became a private bank and post its 2021 fund-raise an associate of the insurer and not a subsidiary any longer. With a loan book of ₹1.34-lakh crore, deposit base of ₹2.22-lakh crore and CASA (current account – savings account) ratio of 54.69 per cent, IDBI Bank’s balance sheet is sizeable. A well-entrenched product portfolio, over 1,890 branches, and the possibility of reducing its gross NPAs further add weight to the bank’s proposition. But is this enough to attract top dollars?

Making exceptions

Incorporated as a company under the Companies Act, IDBI Bank is a low hanging fruit and an easy test case for the government’s aspirational bank privatisation theme. But will the other stakeholders – LIC, incoming investor and, more importantly, the RBI – do what it takes to ensure that the process sails through?

Whether YES Bank, Lakshmi Vilas Bank or even PMC Bank, unless the RBI was willing to make the exceptions to safeguard the incoming investors’ interest (such as writing off bonds and/or equity), saving these banks would have been impossible. Investors may need much more in IDBI Bank’s case.

With 49.24 per cent stake, will LIC content being a large shareholder and not a promoter? Will the incoming investor be granted immunity from litigations, especially from the bank’s union and can they have the last word on valuations? If the incoming investor comes in at the market price or less than ₹61 a share – the price that LIC paid – will the latter be okay?

More importantly, how much stake will the RBI permit the investor to hold? At 26 per cent – the threshold for a bank promoter – the deal would make little sense for the new investor. Anything beyond means the RBI may be regularising exceptions, thus setting indisputable precedence.

So, who will draw the line and where it be drawn?

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