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Capital-crunched public sector banks are offloading some of their non-core investments to cut their losses. IDBI Bank, which has been weighed down by high NPAs and weak profitability, has zoomed nearly 20 per cent over the past week on news of it offloading its entire 30 per cent stake in NSDL E-governance Infrastructure (NEGIL). There are also reports suggesting a possible stake-sale by the Centre in the bank.
But the rally may be overdone, considering the weak underlying core business.
Why the rally
IDBI Bank, which posted a loss for the fifth quarter in a row in the latest December quarter, has the highest gross non-performing assets ratio within the sector. As of December 2017, its GNPA stood at 24.7 per cent of loans, sharply up from 15 per cent in the corresponding period in the previous year.
High net NPA and negative ROA had led the RBI to invoke Prompt Corrective Action (PCA) against IDBI Bank. The PCA involves monitoring certain key performance indicators of banks, and taking corrective measures, if need be, to restore their financial health.
In the Centre’s first tranche of the massive recap plan (₹88,139 crore of capital, of which ₹80,000 crore is via recapitalisation bonds), IDBI Bank was given the most capital (₹10,600 crore). As of September 2017, before the announcement of the capital infusion, the bank’s tier I capital ratio stood at 8.9 per cent; as of December 2017, it is about the same at 8.97 per cent.
Given IDBI Bank’s weak profitability and capital ratio, monetisation of some of its non-core assets can add some buffer to the capital base.
Hence, its latest move to sell its entire stake in NEGIL, and rake in a notable amount (undisclosed in the exchange filing but some reports peg the sale amount at ₹1,100 crore) is a positive. In December 2017, IDBI Bank had also sold its 7 per cent stake in National Securities Depository (NSDL), one among the two depositories in India. From 30 per cent earlier, IDBI Bank’s stake is now down to 23 per cent in NSDL.
Overdone rally?
But while IDBI Bank also has other non-core investments it may try to monetise, the recent sharp rally only on account of a stake sale in NEGIL may be overdone.
The underlying weak core business remains a drag on the overall sum of the parts (SOTP) value of the stock. Also, the value per share of IDBI Bank’s non-core businesses is still minuscule in comparison to the intrinsic (fair value) price of the stock.
At the core level, as mentioned, IDBI Bank’s performance has been dismal. Hence, at 0.5 times its book value (as of December 2017), the value per share would work out to ₹45-50. The other non-core investments would add about ₹10 to the bank’s core value. The current market price of ₹79 per share after the recent run-up appears overvalued.
IDBI Federal Life Insurance is a life insurance company in which IDBI Bank has a 48 per cent stake. The insurance company has seen a 10.6 per cent y-o-y growth in new business premium between April 2017 to January 2018, lower than the industry (private players) growth of 17 per cent during this period.
Its share amongst private players is about 1.4 per cent. Life insurance players in the industry with scale, balanced product portfolios and diversified distribution model will drive premium valuations — SBI Life, HDFC Life, Max, ICICI Pru Life and Kotak Life being some of them. Others are likely to get consolidated.
Since the embedded value of IDBI Federal is not available, we considered the deal value pegged for the company in 2015, when there were reports that Ageas was going to pick up a 20 per cent stake in IDBI Federal for ₹800 crore. This pegs the total value of the insurance company at ₹40,000 crore.
Given that IDBI Federal has not improved its market share since then, these valuations can be used as a benchmark.
The value per share of IDBI Federal for IDBI Bank amounts to about ₹7.
IDBI Bank also has 100 per cent stake in IDBI AMC. The AMC, however, ranks low among the fund houses in terms of AUM (₹10,690 crore as of December 2017). Assigning a lower valuation, it adds about ₹1 per share to IDBI Bank.
Thus, given an SOTP value of ₹55-60 per share, the recent rally in the stock price of IDBI Bank solely on account of the above mentioned reasons (available publicly) may not sustain for long.
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