India Ratings and Research (Ind-Ra) expects a large part of IDBI Bank’s expected synergy building with the Life Insurance Corporation of India (LIC) to be on the backburner, given the impending strategic divestment plans of the Government and LIC.

The rating agency noted that IDBI Bank has benefited some extent on the liabilities front by embedding itself in some parts of LIC’s ecosystem.

IDBI benefited from having some traction with LIC’s collection and payment accounts, branch-level accounts, and transaction flows (together about 3 per cent), but not as much as either Ind-Ra or the bank would have expected, the agency said.

Given the impending strategic sale by both parents, Ind-Ra expects the development of synergy with LIC to be on the backburner.

In October 2022, the Government of India (GoI) kicked off the strategic disinvestment process for IDBI Bank by selling of GoI’s and LIC’s equity stake and transferring management control. The disinvestment process is still in progress.

Currently, GoI and LIC have 49.24 per cent and 45.48 per cent stakes in IDBI Bank, respectively. LIC is the Bank’s promoter with management control and the Government is co-promoter without management control.

IDBI Bank, in its FY23 annual report, said: “Since LIC acquired a majority stake in your Bank in January 2019, numerous initiatives have been taken to leverage the potential business synergies between the two entities.

“Your Bank has identified specific action points in order to garner business in synergy areas through its best-in-class products and services especially in order to build low-cost deposit book – that is current account book, along with efficient and optimal utilisation of its distribution channels/ touchpoints to source business as Corporate Agent of the LIC under the bancassurance channel.”

The Bank has also been extending transaction banking services to meet collection/ payments related requirements of various offices of the LIC through its branch/ digital channels.

Meanwhile, Ind-Ra has assigned ‘A1+’ rating to IDBI Bank’s Certificates of Deposits (CDs) aggregating ₹19,000 crore even as it affirmed existing ratings on its bonds, fixed deposit and senior debt.

Securities with an ‘A1’ rating are considered to have a very strong degree of safety regarding the timely payment of financial obligations. Such securities carry the lowest credit risk.

The ‘+’ modifier reflects the comparative standing within the category.

Ind-Ra said it has not factored in capital support from its majority stakeholders - GoI and LIC - to arrive at the ratings, owing to their planned strategic divestment in the bank.

The agency observed that the ratings reflect the bank’s enhanced systems and processes, improved risk framework, significantly enhanced capital levels, negligible need to provide for legacy gross non-performing assets (NPAs), manageable impact of Covid-19 and limited residual impact, improved deposit profile, continued expectation of maintaining steady-state operating buffers, and reasonable profitability.

These also allow the bank to maintain its market share in advances and deposits while maintaining enhanced capital levels.

In its rating rationale, Ind-Ra opined that the bank would continue to search for a large asset and liability niche to focus on as the process of strategic divestment by two of its promoters – LIC and GoI will continue.

As the bank grows in size and scale and continues to strengthen its capabilities across various facets of banking, the agency expects this to have a positive impact on IDBI’s credit profile.

“The bank now, irrespective of timing of strategic sale, would continue to focus on retail loans, fomenting newer corporate relationships and growing deposits through target marketing and extending branch network,” the agency said.

Ind-Ra does not expect the bank to need incremental capital from external sources to deliver balance sheet growth as per plans in the medium term.

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