The Life Insurance Corporation's (LIC) entry into the struggling IDBI Bank is now attracting quite a few institutional investors, who are keen to invest debt capital in the bank.
They are banking on the insurance and banking combo of IDBI and LIC for a quick turnaround of the development financial institution (DFI) turned bank which has been making losses for the last four years.
In 2018-19, the bank has made losses of Rs 15,116 crore against a revenue of Rs 22,071 crore. But things are gradually changing for the bank, which is still under the Reserve Bank of India's prompt corrective action (PCA) framework.
The bank's recent bond offering of Rs 745 crore was lapped up by banks and a mutual fund, which is considered as one of the best fund houses in India in terms of performance. These bond offered a very attractive interest rate of 9.50 per cent to the investors. In fact, these bonds are part of the capital and Basel-III Compliant.
The HDFC Mutual Fund took more than half of the bond issue. The three funds of HDFC - Balanced Advantage Fund, Banking and PSU Debt Fund and Equity Savings Fund -subscribed to Rs 500 crore.
Similarly, four banks -- Punjab National Bank, Indian Bank, Federal Bank and Bank of Baroda - took Rs 235 crore. A small portion of the bond was subscribed by a non-bank entity.
IDBI Bank's capital adequacy ratio currently stands at 11.987 per cent, which is slightly above the RBI mandated 9 per cent. The capital adequacy also got boosted after LIC pumped in over Rs 30,000 crore into the bank.
There is a hope now with a new promoter LIC in the saddle. In the past, the bank was constrained by the limited capital infusion by the government. The management of the bank also relies on LIC, which brings hope for a quick revival of the bank. In fact, the Union Budget 2021 already proposed dilution of the government holding in the bank, which currently stood at 47.11 per cent. LIC holds a majority 51 per cent.
The current market valuation of the bank is very low at Rs 37,629 crore because of higher NPAs and lower profitability. In fact, any dilution by the government at this stage won't give it a good return. For instance, the bank's price to book, which is a stock market indicator, is at 0.92. Today, Kotak Mahindra Bank gets the highest price to book value of 6.95 times. HDFC Bank comes second with a price to book of 4.36. The State Bank of India gets a price to book of 1.26 times.
Even LIC has to exit the bank as per RBI's directive. The RBI has given 12 years to LIC to lower its shareholding in the bank to 40 per cent from the current 51 per cent. The insurance major will make all efforts to create value in the bank in the next decade to partially exit by making profits for the corporation.
Currently, the bank's biggest challenge is the deterioration of asset quality. The gross NPAs has spiked to record 27.47 per cent. While the bank is focusing on recovery, a lot depends upon the recovery from the bankruptcy code. The bank is also selling its non -core stake to generate resources.