IDBI Bank: High NPAs, new bad loan rules seen offsetting inflows

IDBI Bank has joined the bandwagon of public sector banks (PSBs) rushing to sell their non-core assets to strengthen their balance sheet.

Recently, the lender sold a commercial building for Rs 9 billion, taking the total non-core asset sales to over Rs 41 billion in FY18. Also, the government provided Rs 106.1 billion recapitalisation amount, the highest among PSBs, to this cash-starved bank.

But these efforts seem insufficient given the bank’s high net non-performing assets (NPAs) worth Rs 293.5 billion as of December 2017, which is 16 per cent of its net advances and 1.2 times its net worth. IDBI also has Rs 266.3 billion of assets under various stressed buckets, which are 1.1 times of its net worth as of December 2017. Though IDBI’s management did not comment on the amount of stressed pool likely to turn bad due to the Reserve Bank of India’s new NPA rules, experts see a major chunk turning into NPA in the March 2018 quarter (Q4). Besides, the bank has Rs 287.7 billion worth of cases under the National Company Law Tribunal, which may require additional capital due to higher haircuts.

According to estimates, keeping the risk-weighted asset base of IDBI at December 2017 levels, these capital-strengthening efforts may not help even if the bank’s bad loan write-offs are just 10 per cent of its net NPA. Experts however, said the write-offs were likely to be more than 10 per cent given the Q3 trend, which will add pressure on the capital front.

IDBI is planning to sell more of its non-core assets such as its life insurance arm, IDBI Federal and NSDL. Market reports said IDBI Federal was valued at over Rs 60 billion, so IDBI could get over Rs 28 billion for its 48 per cent stake. In case of NSDL, “According to Sebi’s (Securities and Exchange Board of India) regulation, sponsors’ (IDBI is one of the sponsors) stake should not be less than 51 per cent (currently 61 per cent) in NSDL. So, we can divest only up to 10 per cent till the regulation is not amended,” said G M Yadwadkar, deputy managing director, IDBI Bank. 

“The bank has received bids for its 7 per cent stake in NSDL and is likely to be finalised by June 2018,” said Yadwadkar. 

He also expects the IDBI-Federal stake sale to be completed by June 2018. These moves should help garner an estimated Rs 30-35 billion.

Yet, market experts are sceptical because of absence of credit growth and high bad loans. “The developments (recap and asset sale) will help IDBI to survive. But, its net NPAs are much more than its net worth. Therefore, it’s still a long way to go before investors make money from the stock,” said G Chokkalingam, founder and managing director, Equinomics Research and Advisory. 

Not surprising then, rallies in the counter are seeing selling at higher levels.