IDBI Bank: It's too early to cheer

Amid asset challenges, valuations capture privatisation gains and efforts to improve financials

IDBI Bank's shares have risen 22 per cent since the Budget was announced, against S&P BSE Sensex's six per cent increase. The surge was on account of the government's plans to reduce its stake in the bank below 50 per cent from 80 per cent currently.

Although privatisation will be positive for the bank, concerns are far from over. According to Suresh Ganapathy of Macquarie Capital, the greater challenge is to find a buyer for this stake. "The key issue is other banks/investors will be largely unwilling to buy banks such as IDBI Bank, where there are massive asset quality issues and balance sheet transparency is a big concern."

  The IDBI Bank management has indicated that UK-based CDC and Singapore's GIC have shown interest in picking up a stake in the bank.

Also, the new promoters will have quite a task at their hands. First, the bank's capital adequacy will come under pressure in the near term.

Rating agency ICRA estimates IDBI Bank will need to raise common equity capital of Rs 8,000-11,000 crore and additional tier-I capital of Rs 3,000-4,000 crore during FY17-FY19 to meet the increase in regulatory minimum capital requirement as well as for meeting growth targets. This might be difficult, given that its huge stressed assets will keep provisions at elevated levels and continue to pressurise the bank's profitability. The bank is also looking to raise Rs 3,771 crore via a qualified institutional placement offer and sell stake in non-core assets. In this backdrop, the risk of earnings dilution is also high for the bank. Although the Reserve Bank of India's move to ease definition of capital is a positive, it might not prove sufficient in the medium- to long-term, say analysts.

"A private buyer might not buy a book with negative equity. The current valuation of Rs 13,000 crore seems excessive given that bank licences are available on tap, and relatively better private plays are available at not much higher market cap," writes Investec in a recent note on IDBI Bank.

Also, the new promoters will have to deal with employees who are opposing the move to privatise the bank.

Last week, the bank management had shared a roadmap of doubling business, attain zero net non-performing assets, augment low-cost current and savings account deposits, fee income and return ratios by FY19. However, these efforts will fructify gradually and near-term pressure will continue for the bank, say analysts.