LIC policyholder? IDBI Bank deal to hit you where it hurts

Life Insurance Corporation (LIC) has moved a step closer to pick up a controlling stake in the crippled IDBI Bank, but the move is being widely criticised by the experts and opposition alike. While the development will benefit the IDBI Bank shareholders, it is certainly not a good move for LIC. 

The board of the Insurance Regulatory and Development Authority of India (IRDAI) decided last week that LIC can buy up to 51 per cent stake in IDBI Bank. The IRDAI board cleared the proposal as an insurance company cannot hold more than 15 per cent stake in a company under the IRDAI norms. The life insurance major already owns 10.8 per cent stake in the bank.

As LIC's key rivals in the public sector and in the private sector have their own banks, it makes sense for the state insurer to have its own bank too to improve sales. However, buying stake in IDBI Bank is not a prudent business move for LIC, said experts.

IDBI Bank is grappling with mounting toxic loans which has soared to a staggering Rs 55,600 crore in FY18. In the March quarter it reported net loss of Rs 5,663 crore.

Once the deal goes through, LIC will have board seats in the bank but it may not take part in the daily operations for want of expertise.

Impact on LIC

Valuation-wise plenty of better options are available in the banking space. IDBI Bank has been struggling to survive with mounting losses in the past three financial years while its bad loans hit the roof - a tad below 28 per cent - the highest in the industry. 

Banks such as South Indian Bank (market Value Rs 4035 crore), Karnataka Bank (market Value Rs 3098 crore), Lakshmi Vilas Bank (market Value Rs 2664 crore), and DCB Bank (market Value Rs 5085 crore) etc are trading at attractive valuations.

Impact on LIC policyholders

The policyholders' corpus could have been used in a better manner. 0.4 per cent of the overall corpus (Rs 30 lakh crore) is being used to pick stakes in IDBI Bank. If indeed LIC had to pick stakes in a bank, why did it choose a bank, which is running under losses for the last three years? This is the question that the LIC and government must answer. 

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Impact on IDBI Bank shareholders

The move is positive for IDBI Bank shareholders for the long-term as it will trigger a turnaround for the bank. The deal is expected to get sealed at Rs 70-75 per share, a premium of around 30 per cent. Recently, government had invested some amount in IDBI Bank at Rs 71 per share. 

The fact that LIC-IDBI Bank deal doesn't make much sense for LIC in terms of profitability, it appears the action has been taken to meet the goverment's divestment target of Rs 80,000 crore for FY19. The government will receive Rs 10,000 to Rs 13,000 crore from the deal i.e. 12.5 per cent to 16.25 per cent of its FY19 divestment target.