New Delhi, Mar 05:
Life Insurance Corporation of India (LIC) has been approached to join a consortium, that includes State Bank of India (SBI), to buy stake in YES Bank, sources told Moneycontrol.
Bloomberg had earlier reported about SBI’s plan to pick up stake in the private lender.
LIC did not immediately respond to a query sent by Moneycontrol.
If the insurer joins the consortium, this will be the second such initiative by LIC to lend a hand to an entity facing capital crunch.
YES Bank has found it challenging to raise fresh capital of Rs 14,000 crore. The banking regulator has also found divergences in the bad loan figures reported by the bank.
On the SBI-LIC deal, YES Bank said that it has not received any such communication from RBI or government. On the other hand, SBI said that it will disclose any development to the stock exchanges.
When it comes to LIC, which is on a path to a FY21 initial public offering, it already holds 51 percent stake in IDBI Bank after it bought this stake from the government.
Insurance Regulatory and Development Authority of India (IRDAI) had in June 2018 made an exception when it allowed LIC to hold 51 percent in IDBI Bank. Insurance regulations state an insurer can hold only 15 percent equity stake in an entity to ensure there is no concentration of risks.
Even if LIC joins the SBI consortium, it will require an IRDAI permission to hold more than 15 percent stake in Yes Bank. Though LIC has consistently denied being the ‘white knight’ and bailing out ailing entities, in the past the insurer has invested heavily in both IPOs of state-run entities as well as disinvestment programmes of the government.
Typically, LIC invests between Rs 50,000 crore to 55,000 crore in equities. While LIC maintains that it invests only in instruments based on a strategic call, it is a fact that the insurer has helped key divestments sail through.
However, the insurer’s FY20 equity investment is likely to touch an all-time high. As of February 2020, LIC’s equity investments have reached only 54.5 percent of this fiscal’s target of Rs 86,000 crore. The insurer has invested Rs 46,850.33 crore into equities between April 1 and January 31 (FY20).
LIC-IDBI Bank deal
In January 2019, LIC completed the deal with IDBI Bank and holds majority stake in the entity. However, the bank is still under prompt corrective action framework that restricts its ability to lend. For Q3FY20, the bank reported a net loss of Rs 5,763 crore, widening on sequential as well as year-on-year basis despite sharp fall in provisions. Higher tax provision impacted profitability. However, the bank’s asset quality improved during the quarter with gross non-performing assets (NPA) as a percentage of gross advances falling 71bps QoQ to 28.72 percent. Net NPA also declined 72bps to 5.25 percent QoQ in same period.
On the other hand, LIC is also looking at options to unlock value in IDBI Bank.
“Reserve Bank of India (RBI) has given us a 12-year period to bring down the stake in IDBI Bank to 15 percent. But we may not want to wait that long especially since we will also be listed. We need to look at options to unlock value,” said LIC chairman M R Kumar at an event in February 2020.
However LIC will not be immediately offloading its stake in IDBI Bank. Sources said that the insurer is waiting for a better price because the acquisition price was more than the present value.
How will Yes Bank benefit LIC?
Though Yes Bank is yet to declare its December quarter results, the private bank had posted a loss of Rs 600.08 crore during the September quarter, dented by higher provisions and one-time deferred tax assets adjustment with sharp increase in non-performing assets.
Net interest income during the quarter declined 9.6 percent year-on-year to Rs 2,185.91 crore, including the impact of around Rs 228 crore due to fresh slippages during the quarter.
Credit and deposits declined 6 percent each YoY while net interest margin also contracted 10bps sequentially and 60bps YoY to 2.7 percent in Q2FY20.
If a stake purchase is done by SBI and LIC, the immediate capital worries of the bank will be over. This will have to be followed up a cleanup of a balance sheet. Yes Bank’s exposure to commercial businesses will also be looked at.
LIC will get access to the bank’s 1,000 odd branches to distribute its insurance, pension and mutual fund products. However, the insurer will also have to infuse capital and train ground staff.
With LIC’s listing just a few quarters away (as per goverment timelines), the insurer’s investments will be under close scrutiny. If LIC invests into Yes Bank, the rationale behind this decision will be keenly watched by the market.
IRDAI’s recent stewardship guidelines state that the strategy and reason behind key investments by insurance companies will have to be disclosed to the public. LIC’s reasoning, in case the deal happens would be an interesting read.
