IDBI Bank stake sale: Dressing up a must before handing it over to a new suitor

Even as the interest in buying out the development financial institution (DFI) turned full-scale bank, IDBI Bank, is gaining some momentum, there is a view that the government and the LIC should get the valuation upside as the operating environment is now positive for the bank with the setting up of bad bank, the turnaround in its operations, business synergy initiatives rolled out with LIC partnership and the gradual opening of the economy post second wave of pandemic.

The government has already given a go-ahead for selling the entire stake in the private bank with transfer of management. LIC as a promoter owns 49.24 per cent stake, whereas the government has 45.5 per cent stake.

Names like Prem Watsa's Fairfax and a few private equity players are doing the rounds, though there is no confirmation.

However, the valuation of the bank is going to be the key. There are already a lot of positive developments underway which are expected to push up the valuations.

Currently, the bank's valuation or market cap is too low. The bank with a balance sheet size of Rs 3 lakh crore has a market valuation of a meagre Rs 42,000 crore. The price to book, which is a valuation parameter for banks, is at 1.08 times. This ratio is over two times for private banks.

"The bank's price to book should get to the level of at least two times the book, which will give it a valuation at Rs 80,000 crore plus," said sources.

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While some point out the high gross non-performing assets (NPAs) of over 22 per cent plus as a big valuation destroyer, the sources said that net NPAs are too low at 1.67 per cent. "The bank is one of the partners in the bad bank. The new framework of bad loan resolution will help the bank in cleaning up its NPAs," they said.

It has been just about seven months since IDBI Bank came out of RBI's prompt corrective action framework. The bank was tagged as a weak bank since 2017 and was operating in a very restrictive manner because of the central bank’s restrictions on lending as well as on using money on any expansion.

The bank has also turned profitable for the first time in five years. It has now transformed into a retail bank with a loan mix of 60 per cent in home loans and other consumer loans. The synergy initiatives with the LIC are also gradually showing good results.

Recently, the bank also offloaded its entire stake in the ARCIL, an asset reconstruction company. The sale of non-core assets is also expected to improve capital levels.

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