YES Bank, IndusInd, IDFC First shares: What Citi, Jefferies say on IRDAI consultation paper; targets

Bank stocks, led by YES Bank Ltd, IndusInd Bank Ltd, IDFC First Bank Ltd, tanked up to 5 per cent in Thursday's trade, said tighter commission norms proposed by insurance regulator IRDAI are seen hitting earnings of lenders.

IndusInd Bank and IDFC First Bank have higher exposure to banca commission while ICICI Bank and PSU banks have lower risk, global investment bank, Jefferies, said.

The insurance regulator proposed to tighten caps on insurance commissions from FY28. It has sought public opinion on draft norms over next month, and rules apply prospectively. "This will be tad negative for banks' bancassurance fees, especially credit-protect premiums, as it's mostly single premium with high commissions," Jefferies said.  

Shares of IndusInd Bank fell 5.2 per cent to hit a low of Rs 910 on BSE. IDFC First Bank slipped 4.06 per cent to Rs 84.32. YES Bank was down 3.23 per cent at Rs 22.49 apiece. ICICI Bank Ltd edged 0.18 per cent lower at Rs 1,335.10.   Axis Securities said the proposed reforms are largely a commission-rate reset rather than a volume issue for banks, as insurance distribution is predominantly driven by cross-selling to existing customer base. Insurance commissions account for 5-25 per cen of core fee income and 2-12 per cent of core PPoP across the banks, making earnings sensitivity highest for players with greater reliance on distribution income.

"Among large banks, HDFC Bank appears to be exposed the most, while among mid-sized private banks, Yes Bank, IDFC First Bank and Indusnd Bank could see relatively larger impact. The framework is more challenging for distribution-heavy platforms such as PB Fintech, where protection products form a significant share of profitability and could materially compress earnings if the current proposals get implemented," Axis Securities said.

Jefferies said the proposed changes are a slight earnings risk for banks. For now, it has maintained 'Buy' rating on 10 bank stocks including IndusInd Bank, IDFC First Bank, HDFC Bank, ICICI Bank, State Bank of India and Punjab National Bank, suggesting up to 33 per cent potential upside. 

       In another note, Citi said the consultation paper directly targets the two channels. The first is bank corporate agency as life new business' average commission ranged up to 72 per cent in multi-tie-up arrangements. The second is NBFC corporate agency channel. 

"Current commissions on credit-linked products are often multiple times higher than these proposed caps. The regulator specifically cites group-credit-life effective payouts rising toward 45 per cent and NBFC channels averaging 42 per cent payout ratios. If implemented substantially in current form, this could compress insurance distribution economics for banks and NBFCs by 70-90 per cent in several high-margin categories," Citi said.