Is IDBI Bank a good buy for LIC, or will it put pressure on the insurer's earnings?
At the end of the fourth quarter of FY18, the gross non-performing assets (of debt portfolio) of Life Insurance Corporation of India (LIC) rose to 6.23 percent compared to 4.73 percent a year ago. In its investment assets, the provisions for doubtful debt stood at Rs 20,513 crore, a sharp increase from Rs 14,084.90 crore last year.
These numbers will come under further pressure with the life insurer receiving the insurance regulator's approval to hold 51 percent in IDBI Bank.
The bank is not in good health. Its percentage of gross non-performing assets (NPA) jumped to 27.95 percent in Q4FY18 compared to 21.25 percent a year ago.
Assets vis-à-vis liabilities
LIC collected premium (first year premium plus renewals) of Rs 3.18 lakh crore in FY18, a jump of 6 percent over the previous fiscal year. The size of its balance sheet jumped by 10.4 percent to Rs 27.9 lakh crore as on March 31, 2018, according to public disclosures made by the insurer.
Investment assets stood at Rs 27.23 lakh crore, of which the life fund (traditional business) stood at Rs 20.79 lakh crore.
"The NPA ratios of the life insurance company will take a further hit in the first two quarters once the acquisition is completed," said a senior industry official.
LIC did not immediately respond to an email sent by Moneycontrol seeking a clarification on the provisions for doubtful debt.
During the fourth quarter of FY18, IDBI Bank's provisions for non-performing assets rose by 77.9 percent to Rs 10,773.30 crore from Rs 6,054.39 crore in the year-ago period. This led to the bank increasing its provision coverage ratio (PCR) to 63.40 percent in FY18 from 54.96 percent in FY17.
It won't amuse LIC's millions of policy holders that the insurer will be buying its additional stake in IDBI Bank by dipping into its policyholder account. According to public disclosures, the insurance company has Rs 26.04 lakh crore of assets in its policyholder account as on March 31.
Sources said that LIC will have to infuse Rs 8,000-10,000 crore in IDBI Bank.
LIC's solvency is 158 percent (assets over liabilities) as against a regulatory requirement of 150 percent. This is the minimum capital that an insurance company is required to maintain.
While it adhered to the regulatory requirements, LIC's solvency is lower than its private sector peers. The average solvency is around 210 percent.
LIC's equity push
The new deal comes at a time when the life insurance giant is slowly reducing its exposure to the stock market. In an earlier interaction, LIC Chairman VK Sharma had said that it will be not be as aggressive on the stock market.
LIC may invest around Rs 45,000-48,000 crore in the stock market this year. It is not clear whether the IDBI Bank acquisition will be a part of this or will be treated as a separate investment.
Although LIC could make money in the long term, with it being a contrarian investor, it could see a short-term impact on its equity portfolio. It is also anticipated that LIC could be restricted from having a high equity exposure to the banking sector, once this deal goes through.
Bad loans of IDBI Bank
During the fourth quarter of FY18, IDBI Bank's provisions for non-performing assets rose by 77.9 percent to Rs 10,773.30 crore from Rs 6,054.39 crore in the year-ago period. This led to the increasing its PCR to 63.40 percent for FY18 from 54.96 percent in FY17.
The RBI's February 12 directive on non-performing assets also led to a rise in slippages for the bank in Q4FY18. Their total slippages into bad loans jumped by Rs 12,823 crore, of which about Rs 9,000 crore was due to the directive.
The first step for LIC will be to clean the bad loan portfolio of IDBI Bank. After this, the life insurer would be involved in restructuring the bank's functioning and driving its profitability. Product distribution is also likely to fall into LIC's lap since it will be the single largest shareholder.
The only green shoot in sight is the retail portfolio, which the bank is looking to increase to 29 percent this year from 25 percent last year. Retail assets stood at Rs 88,599 crore as on March 31. The number of savings accounts stood at 16.56 million for FY18. These accounts could be used to LIC's advantage to cross-sell insurance products. The insurer had infused Rs 394 crore capital into IDBI Bank in FY18.
However, if you compare IDBI Bank's retail portfolio to its public sector peer State Bank of India, it is miniscule. SBI's personal retail advances stood at Rs 5.46 lakh crore as on March 31.
Impact on provisions
Since the first two quarters are generally slow moving in terms of premium collections for insurance companies, LIC may have to provide a further sum for the doubtful assets after the IDBI Bank stake purchase goes through.
Though the structure of IDBI Bank after the stake sale has not been finalised, sources said that it could be a subsidiary of LIC. Whether the life insurance major decides to absorb the bad loans immediately or give a timeline of a few years for this exercise will be watched closely by the market.