Just State Bank of India, HDFC and ICICI Bank will have to offload equity worth Rs 1.21 lakh crore if the central bank goes ahead with its reported plan to make banks cap their stakes in insurance arms at 20 percent, says a report.
Quoting unnamed RBI officials, a media report earlier this week said the monetary authority is not comfortable with banks owning controlling stake in non-core businesses like insurance ventures which are capital guzzlers and wants banks to cap ownership in insurance arms/ companies at a maximum of 20 percent.
It was also reported that the RBI recently approved Axis Bank’s plan to buy Max Life only after it agreed to directly hold only 10 percent and also capped the overall holding at 20 percent.
Current regulations allow banks to own over 50 percent stake in insurance arms.
If the RBI forces promoter banks/NBFCs to lower their stakes to 20 percent, this can significantly increase free float in the four listed insurance arms of HDFC, ICICI Bank and SBI worth Rs 1.2 lakh crore alone, Kotak Securities said in a report on Thursday.
HDFC owns 50 percent in HDFC Life and bringing it down to 20 percent would mean offloading equity worth Rs 44,100 crore at today’s market value, while in case of ICICI Prudential Life which is 51 percent owned by the bank, it will be Rs 22,100 crore worth of shares flowing into the market, and Rs 21,700 crore worth of shares from ICICI Lombard in which the bank owns 52 percent.
SBI which owns 55 percent in SBI Life will have to sell shares worth Rs 32,200 crore.
The total value their excess holding is worth Rs 1,20,100 crore, says the report.
Almost all state-run banks and large private sector banks also have unlisted life and non-life insurance ventures.
Calling for maintaining the status quo, the report said banks owning insurance companies has been a win-win for all and that there are many positives in that structure such as insurance stake sales have supported banks’ provisioning in challenging times.
Large value unlocking in insurance companies have helped banks earnings in challenging quarters and provide buffer against bad loans, says the report, adding HDFC and ICICI Bank have made large gains from stake sales in their life and general insurance arms and these gains were used to create provisioning buffers.
During FY16-18, HDFC used over 40 percent of such gains to create provisions, and for ICICI Bank such capital gains contributed around 40 percent of annual provision.
HDFC has since 2016 sold stake in life and non-life arms for Rs 10,900 crore, while ICICI Bank gained Rs 15,300 crore and SBI made Rs 12,670 crore so far.
Banks also get a good fee income from insurance distribution to the tune of 2-3 percent of overall revenue and 5-15 percent of their pre-tax profit, which for Axis Bank stood at 15.7 percent, 6.4 percent for HDFC Bank, 7.3 percent for ICICI Bank and 5.7 percent for SBI in FY20.
Bancassurance has emerged as a strong channel for distribution of insurance products with this model getting as much as 54 percent of insurance sales in FY20.
While bancassurance models can be successfully run even without ownership, historic experience suggests that insurance companies with bank ownership have been more successful than others, says the report.
Also that the RBI fear that insurance is a capital guzzling business and this jeopardise the interest of bank depositors is not supported by evidence, especially in regard to life insurance companies, it stated.
The RBI can secure banks by making prior regulatory approval for investments in insurance arms mandatory.