LIC’s IDBI Bank Investment: Reluctant And Unprofitable?

When India’s largest insurer was nudged into acquiring distressed IDBI Bank Ltd., the deal was touted as a “win-win” for both companies.A little over two years later, Life Insurance Corporation of India has approvals in place to divest its stake, even though timelines for the sale remain unclear. Still, as it mulls an exit, LIC may find that its investment neither made financial sense, nor did it bring synergies to the extent envisaged. The bank, however, benefited from the capital LIC invested, which played a crucial part in cleaning up its books.Emails sent to LIC and IDBI Bank with queries for the story did not elicit a reply.An Unprofitable PropositionEarlier this month, the government approved a plan for strategic divestment in IDBI Bank. While the extent of the stake sale was not disclosed, the life insurer’s board has also passed a resolution that it would part with its stake with an intent to relinquish management control. Presently, LIC is the promoter of IDBI Bank with a 49.24% holding, while the government owns 45.48%.LIC bought a stake in IDBI Bank in phases, starting two-and-a-half years ago:In October 2018, IDBI made a preferential allotment to LIC for 34 crore shares at Rs 61.73 apiece, for a total of Rs 2,098 crore.In December 2018, another 239 crore shares were allotted at Rs 60.73 apiece, for a total of Rs 14,500 crore.In January 2019, LIC acquired an additional 83 crore shares at Rs 60.73 apiece, for a total of Rs 5,026 crore.Cumulatively, by Jan. 21, 2019, LIC had bought a 51% stake in IDBI Bank Ltd. for Rs 21,624 crore at an average price of Rs 61 per share.In September 2019, LIC contributed Rs 4,743 crore as part of a Rs 9,300 crore capital infusion plan into the lender.As such, LIC’s total investment into IDBI Bank is equal to Rs 26,367 crore. Post a QIP issue, LIC’s stake now stands at 49.24%..While the timing of the deal is unclear, hypothetically, an exit at the current market price of Rs 38.85 per share, would value LIC’s stake at Rs 20,568 crore, implying a loss of about Rs 5,800 crore on the investment..“The deal may happen at the current value or slightly higher than that, as growth prospects and control premium will also be included in its valuation,” said Abizer Diwanji, partner and national leader - financial services at EY.The bank’s recent qualified institutional placement in December 2020 happened at Rs 38.60 per share and gives some indication on how its shares may get priced.According to Diwanji, there are two possibilities. In the first scenario, a large strategic buyer could take over the bank at a valuation close to its book value, in which case LIC would be selling its holding at a loss. In the second and more plausible scenario, the insurer may hold on to some of its stake, say between 15% - 26%, and can sell it later at a better valuation.“It will be nearly impossible for the bank to attract a high premium to its current price-to-book value of nearly one, considering its business has just begun to stabilise and the road ahead is fraught with uncertainties due to the pandemic,” he said.LIC's potential sale of IDBI bank holding will fetch lower than its acquisition price at the current juncture, said Dhananjay Sinha, managing director at JM Financial. “It [LIC] seems hard-pressed to exit before it goes public itself as the government looks to meet its disinvestment targets,” he said..Reluctantly, Yours.When announced, the investment in IDBI Bank was also seen as a strategic bet. “LIC and IDBI Bank can realise their business potential in numerous ways by focusing on cross-selling of products and services...,” said a press release issued at the time.It didn’t exactly work out that way, said a former senior IDBI Bank official who was at the lender when LIC became a promoter to the bank. He spoke on condition of anonymity..They [LIC] were always a reluctant partner, who never wanted to be part of this whole thing to begin with, he said..Some of the synergies that were foreseen included:Cross-selling of LIC’s insurance products via the bank’s branches.Tapping LIC’s wide distribution network, which includes over 10 lakh agents, to cross-sell the bank’s products and services.Make IDBI Bank a primary bank for LIC for extending banking services, such as deposit and current account facilities, and cash management services.Cross-sell IDBI Bank’s retail loans to LIC’s customers, active agents, and employees.Extend broking, investment and advisory services to LIC on its future acquisitions and sell-offs.Except for becoming its largest bancassurance partner, none of the other synergies really worked out as was expected, the official said.IDBI Bank, he said, wanted to become a primary banker to LIC. That did not happen to the desired extent as LIC’s senior management did not have enough hold on the banking arrangements of their regional offices, the official quoted above said. Considering it is a public sector behemoth with over 2,000 branch offices, most of its regional heads continued their existing relationship with other banks, despite the senior management's nudge to move their accounts to IDBI Bank.If LIC wanted, it could have worked to strengthen the business linkages and work on new ones, such as a cards business that was also a part of our discussions, the official said. “But their executives never engaged themselves into the bank’s operations, and were only present for the board meetings,” he said.Another IDBI Bank official, who is still with the lender, had a different perspective. According to him, they have achieved what they set out to do. This official cites the fact that 40-50% of LIC’s premiums collected via bancassurance channels come from IDBI now. The bank is also getting current account deposits via LIC, although, this official too accepts that certain parts of LIC continue to bank with earlier partners.IDBI Bank’s Knight In Shining ArmourWhile LIC appears to have seen limited benefit from the deal, for IDBI Bank it proved to be a lifesaver.In Sep. 2018, IDBI Bank had gross bad loans equal to 31.78% of its loan book, while its risk-weighted capital adequacy was at 6.22%, much lower than the minimum regulatory requirement of 9% for banks.It desperately needed capital, which LIC was brought in to provide.As of the fiscal ended March 31, 2021, the lender's gross non-performing assets were still high at 22.4% of its advances. However, the bank had a provision coverage ratio of 97% and the net NPA ratio had fallen to 1.97%. Its capital adequacy ratio is currently at 15.59%..Exiting Too Soon?To be sure, if LIC wanted it could hold on to the IDBI investment for longer. The RBI had only asked the lender to bring down its stake in the bank to 40% over a period of 12 years.But the insurer wants to exit the bank before its own initial public offer that is due to be launched between July-September next fiscal, a person directly involved in the matter told BloombergQuint on condition of anonymity.“This makes complete sense as LIC has operated like a closed box so far, with restricted disclosures, governance and transparency on its investment and exit decisions,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services.“But if it gets listed, this box will be opened and scrutinised by the market, and its decision to invest in IDBI Bank may be questioned, which could in turn affect its own valuation. Isn’t it better than to avoid all that and sell the investment in the bank at the first best opportunity?” he said. "The IDBI Bank investment, even if sold at a loss, is a tiny drop in the large investment book of LIC, and is likely to get absorbed without much impact," said Parekh.As per the latest data available, LIC's balance sheet was about Rs 36 lakh crore as of December 2020. The insurer's investment yield was at 7.23% as of Dec. 2020, a little lower than the 7.39% during nine months ended Dec. 2019. The yield is calculated based on the mean policyholders' fund.The IDBI Bank official quoted above said that LIC may remain the bank’s second-largest shareholder and exit only in bits and pieces.If so, the insurer may have some hope to salvage its investment. Else, it stares at an unprofitable exit."No matter if the stake is sold at lower or at par value of LIC's initial acquisition, it is clear that it has got close to zero returns from its over two-year-long investment into IDBI Bank," said Sinha.

LIC’s IDBI Bank Investment: Reluctant And Unprofitable?

At current market price, LIC will make a loss on its investment in IDBI Bank. Many of the synergies have not worked either.

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