Analysts Cheer ICICI Bank’s Relief From Paring Stake In Insurance Arms
The government, on RBI’s recommendations, has exempted ICICI Bank from reducing stakes in its insurance arms for three years.
Analysts expect the government’s move to exempt ICICI Bank Ltd. from paring stake in its life and non-life insurance units to remove an overhang from their stocks and pave the way for consolidation among insurers.
The central government, on the recommendation of the Reserve Bank of India, exempted ICICI Bank from reducing holding in ICICI Lombard General Insurance Co. and ICICI Prudential Life Insurance Co. to 30% for a period of three years, according to the lender’s exchange filing.
This assumes significance as the general insurer had proposed an acquisition of Bharti Axa General Insurance in August this year, which, if consummated, would have reduced ICICI Bank’s holding in the subsidiary to less than 50%. According to banking regulations, lenders are allowed to either hold more than 50% stake in an insurance arm or 30%, but not between 30 and 50%. Bharti Axa’s acquisition would reduce ICICI Bank’s stake in ICICI Lombard to 48%. Currently, the private bank holds 51.9% and 51.4% stake in ICICI Lombard and ICICI Prudential Life, respectively.
“This is a key positive for ICICI Lombard. A reduction of stake to 30% was one of the key reasons that the stock had underperformed after Bharti Axa deal. This eases the concern and now investors will start valuing the company from a business perspective for the next three years and the stock will perform well,” Prayesh Jain, research analyst at Yes Securities, told BloombergQuint.
According to Morgan Stanley, the development will have no impact on current bancassurance arrangements between the bank and its insurance subsidiaries. The lender, however, can reapply for an extension after three years, if required. Also, the exemption would allow ICICI Lombard and ICICI Prudential Life to consider merger or capital-raising options to further lower the bank’s holding, the research firm said in a note.
To be sure, the bank in the filing said it has no current plans to divest to less than 50% shareholding in ICICI Prudential Life.
Reacting to the development, shares of ICICI Bank and ICICI Lombard were trading close to 2% higher than previous close on Tuesday. ICICI Prudential Life, however, dropped 1%. That compares with a 0.52% gain in the Nifty 50 Index.
While the exemption is currently granted only to ICICI Bank and there is no change in the RBI’s rule, whether other banks will follow suit can’t be ascertained and is to be clarified by the regulator. Still, analysts see this as a possible relief for the insurance sector.
“The move sets precedence for other banks as well, as they might not be asked to reduce the stake to 30% in their insurance subsidiaries,” Jain of Yes Securities said. “Currently, it seems that the exemption is granted only to ICICI Bank. But it definitely eases the concerns, so supply shock in the markets won't come in. It’s a relief for the sector.”
Nitin Aggarwal, research analyst at Motilal Oswal, told BloombergQuint that the “central government and the RBI has taken a prudent step by allowing this exemption as it will open up merger and acquisition prospects for many players and might lead to more consolidation in the sector at large”.
As of June 2020, State Bank of India held 55.5% stake in SBI Life Insurance Co. and 70% in SBI General Insurance Co., while HDFC Ltd. owned 50.14% of HDFC Life Insurance Co. and 50.47% of HDFC Ergo General Insurance Co.