It’s been almost seven years since the government first made its intention to divest its shareholding in IDBI Bank in early 2016 and the Centre may finally be getting to take the first step of exiting the lender.
After a raft of legal and regulatory relaxations that practically allowed any and every investor to seek a stake, the government is said to have received five expressions of interest.
If the Centre can clinch a deal, it would mark a significant step towards its intention to fully exit IDBI Bank and help Life Insurance Corporation of India (LIC) lower its stake from 49 percent currently.
However, the 1.6 percent rise in IDBI Bank’s shares on January 9 is rather underwhelming and hardly reflects the potential changes an ownership shake-up can bring. That is because the conviction among investors that the process would end successfully is weak.
The scepticism comes from the fact that the government has failed many times to bring in investors. Additionally, IDBI Bank’s cleaned-up balance sheet is yet to inspire confidence.
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The answer to whether the government will find a suitor and be able to turn IDBI Bank into a valuable private sector lender, therefore, is not a straight yes. As always, it depends on what the prospective buyer is willing to pay for a chunk of India’s banking business.
Valuation dance
The failure of past efforts to get investors has been partly attributed to the government ascribing a steep valuation to the bank. LIC bought 51 percent in IDBI Bank at an average price of Rs 61 per share in 2019, valuing the bank at roughly Rs 65,000 crore. The lender’s current market capitalisation stands at about the same level of Rs 65,000 crore, or 1.45 times its estimated book value for FY23.
LIC’s capital infusion did little to valuations but had a higher impact on the bank’s financials. For one, the bank is a profit-making entity now. It reported a net profit for both FY21 and FY22 after a gap of five years. Its operating profit has grown by 24 percent on a compounded annual growth rate (CAGR) basis for the FY20-22 period.
In March 2021, the bank came out of the regulator’s restrictions on its lending business under the prompt corrective action scheme. Most of its stressed loans are provided for, reflected in its net bad loan ratio of 1.15 percent as of September. This compares well with its peers that have similar net bad loan ratios. Its franchise of 800-plus branches and the liabilities book of Rs 2.3 lakh crore worth of deposits as of September is of immense value for a buyer.
Analysts said the government has a fair shot at getting a reasonable valuation for the bank, compared with past instances. The general optimism about the banking sector will also play a critical role in getting the government and LIC more pennies to a share of its lender.
Bloomberg reported in October, citing an unidentified government official, that the Centre wants a premium of 30 percent over the current market price, which puts the valuation at $7.7 billion. IDBI Bank shares have surged 33 percent since the government said in October it is inviting expressions of interest.
Much of the share’s outperformance has come in the past six months, when talk of a stake sale strengthened. The 83 percent jump in IDBI Bank’s stock as against a 62 percent gain in the Nifty PSU Bank index shows the effect of the privatisation news flow. On the back of these gains, the stock now trades at 1.45 times its estimated book value for FY23. This is second only to State Bank of India’s valuation multiple of 1.8 times the FY23 book value.
However, valuing IDBI Bank at par with the largest lender or above some of its superior public sector peers such as Canara Bank or Bank of Baroda would be naïve on the government’s part, analysts said.
“Granted that the bank has improved a lot and it has got a new management and leadership, which is good for business. But if the government wants the investor to get something out of the business, they cannot value it at a steep premium today,” said a banking analyst with a foreign brokerage. “Ultimately, a foreign investor would want maximum bang for his dollar and for that his entry needs to be reasonable.”
Discomfort of public sector
A big reason for investors to hold on to their scepticism about IDBI Bank’s fortunes is the proverbial public sector stamp on its business and culture. To be sure, it has shed its perception of a slow-moving public sector entity prone to weak underwriting skills and lack of freedom from low-earning social schemes and dictations of the government.
It has also overhauled its risk management processes, offloaded some of the most troubled assets to a bad bank, and started to ramp up its digital game. Even so, shaking off the public sector vibe and unlearning practices are difficult. The fact that its ownership has merely shifted from the government to a government-owned entity does little to the bank’s prospects.
“It is fair to expect that the bank has cleaned up its act. After all, the numbers do show that. But to shake off a PSU culture is not easy and you should note that the improvement in bad loan ratios is largely on the back of write-offs,” said a former central banker.
Although marquee private equity funds such as billionaire Prem Watsa-led Canada’s Fairfax Group and Middle East banking group Emirates NBD are said to be among the early bidders, the IDBI Bank stock hasn’t moved significantly. Prospects for a rerating remain thin and depend entirely on the stake sale conclusion.
For the bank to turn from a bad penny into a gift horse, it not only needs a fresh lease of capital but also a lot of faith. The government can inspire the latter by sticking to a reasonable price.
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