Selling shares in IDBI Bank: A must before handing over to a new client

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While interest in buying up development finance institution (DFI), which has become the full-fledged IDBI Bank, is gaining momentum, the view is that the government and LIC should pull valuation up as the business environment is now positive for the bank with the establishment of a bad bank, the U-turn in their operations, the introduction of business synergy initiatives with the LIC partnership and the gradual opening of the economy after the second wave of pandemics.

The government has already given the go-ahead for the sale of the entire stake in the private bank with the handover of management. As a promoter, LIC owns 49.24 percent of the shares, while the government holds 45.5 percent of the shares.

Names like Prem Watsa’s Fairfax and some private equity players are making the rounds, though there’s no endorsement.

However, the bank’s valuation will be key. There are already many positive developments underway that should drive valuations higher.

Currently, the bank’s valuation or market capitalization is too low. The bank, with total assets of Rs 3 lakh crore, has a market valuation of a meager Rs 42,000 crore. The price to book, a valuation parameter for banks, is 1.08 times. This ratio is more than twice as high for private banks.

“The bank’s book price should be at least twice its book value, giving a valuation of Rs 80,000 crore plus,” sources said.

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While some cite the high gross non-performing assets (NPAs) of over 22 percent as a major valuation destroyer, sources said the net NPAs are too low at 1.67 percent. “The bank is one of Bad Bank’s partners. The new framework for managing bad loans will help the bank clean up its NPAs, ”they said.

It’s been just seven months since IDBI Bank got out of the RBI framework for immediate corrective action. The bank has been classified as a weak bank since 2017 and acted very restrictively due to the central bank’s restrictions on lending and the use of money for any expansion.

In addition, the bank is profitable for the first time in five years. It has now grown into a retail bank with a credit mix of 60 percent of home loans and other consumer loans. The synergy initiatives with the LIC are also gradually showing good results.

Recently, the bank also dumped all of its stake in ARCIL, an asset recovery company. The sale of assets that are not part of the core business is also intended to improve capitalization.

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