If investing is entertaining, if you are having fun, you are probably not making money. Good investment is boring," said the legendary investor George Soros. The 51 per cent investment by Life Insurance Corporation (LIC) in the struggling IDBI Bank hardly fits into Soros' "boring" category. It is, in fact, risky - imagine the future of a bank with one-fourth lending book in the non-performing asset category, mounting losses and lending restrictions on account of the "weak bank" tag given by the Reserve Bank of India (RBI).
Whichever way you look at it, the entry of LIC in the state-owned bank has given hope to investors. The stock, which was trading near the Rs200 mark in November 2010, came under pressure after the bank faced asset quality pressure and was trading around Rs53 in August 2018. Then, the Cabinet approved acquisition of controlling stake by LIC through a combination of preferential allotment and open offer of equity. The stock rise after LIC's entry is captured in the BT500 study of market capitalisation between October 2018 and September 2019 as compared to the corresponding period between 2017 and 2018.
The presence of LIC as a promoter makes IDBI a turnaround candidate. The IDBI Bank story looks more convincing among the top market cap gainers in the pack where banks such as Corporation Bank , Allahabad Bank and Oriental Bank of Commerce also feature (See The Big Market Cap Gainers). Market experts say it wouldn't be wrong to say that IDBI Bank is the bank of hope for investors.
Limited capital infusion from the government was hampering the growth of public sector banks, including IDBI. The options to raise capital from the market were also shut because of poor financials and low valuations. The new promoter is not short of funds to invest. LIC has already pumped in Rs21,624 crore capital into the bank. As a result, the capital adequacy of the bank rose from a low of 8.14 per cent to 11.58 per cent by March 2019 as against 9 per cent mandated by RBI. This will help the bank shed the RBI's "weak bank" tag and give it more freedom to lend. RBI had put the bank under the prompt corrective action (PCA) framework in 2017. The PCA allows only safe retail lending till the bank shows improvement in profitability and asset quality.
Many experts question the freedom the bank will get to hire talent from outside and introduce variable pay to encourage employees to perform better. "It is public money and not government money. But in spirit, there is no difference between LIC and the government," says Abizer Diwanji, Partner and National Leader (Financial Services), EY India.
The new promoter also brings in stability in top management. Unlike other PSBs where the senior management team is drawn from different banks, LIC has got the right to nominate chairman, MD&CEO and also two deputy MDs. "This will be beneficial for implementing a long-term strategy," says a banker.
LIC is already working to bring its network, policyholders and premium collection system closer to the bank. There are also plans for on-boarding LIC agents as home loan agents for the bank. Lakhs of LIC agents can help in scaling up the bank's retail business. At present, retail constitutes over half the bank's lending book, which includes retail, SME and agriculture. "Our target is to take the retail contribution to 55 per cent by next year from the current 51 per cent," Rakesh Sharma, MD&CEO, had told investors after joining in October 2018. Sharma refused to participate in the story as the company was in the silent period (its second quarter results would be out by November 8). This is the time to introduce new systems and processes for the credit assessment and risk management vertical.
The low-cost current accounts and savings accounts (CASA) keep a bank's cost of funds low, increasing net interest margins. IDBI is trying to get LIC's accounts which it maintains with many PSBs to increase its CASA ratio, which is at 42 per cent.
The biggest challenge is on the asset quality front. IDBI Bank's gross NPAs are the highest among Indian banks at 27.47 per cent. ICRA, which downgraded the bank's rating two months ago, said the high level of slippages and credit provisioning will continue to result in losses in 2019/20. "It is mainly because of elevated level of stressed assets that are yet to be provided for," it said. The bank is focussing on recovery and reviewing risk management and credit policies to strengthen the asset portfolio. However, monetisation of investments in various financial services businesses under the erstwhile IDBI Ltd has been dragging for long. This will not only generate liquidity but also contribute to profitability, which is much needed now because of higher provisioning for bad loans.
The assets include a 19 per cent stake in asset reconstruction company ARCIL. The bank also plans to sell its stake in 19 unlisted companies. It also owns a stake in a life insurance player IDBI Federal Life Insurance Co. "The bank has to do a lot more to transform. It is effectively a PCA bank. It needs to work on processes," says a former banker. The bank will come out of its problems in the next two-three years, but challenges remain as the PSB banking landscape is set to change with half-a-dozen large banks with over Rs10 lakh crore balance sheet size, two national banks and four regional banks. IDBI Bank, with a Rs3.13 lakh crore balance sheet, has to decide its niche area to face the revamped PSBs, private sector banks and small finance banks. "IDBI has a competitive advantage in the new PSB landscape. It has a manageable size. Possibly, it's a great opportunity when the other four banks (under merger) stabilise. IDBI should get its act together and start moving," says Diwanji.
The bank is out of clutches of the government as far as capital infusion is concerned. But will the government also stay away from exercising control like what it does with other PSBs? After all, LIC has often been used by the government for bailing out other public sector companies, including banks. This is something that can come in the way of value creation for both LIC and IDBI Bank's shareholders.