Stake sale in insurance arms may help banks with their NPAs

Key Highlights: 

• SBI Life Insurance IPO oversubscribed by 3.58 times 
• ICICI Lombard IPO oversubscribed by 2.98 times
• Both SBI Life and ICICI Lombard have made their market debut

Last month two companies – SBI Life Insurance (SBI Life) and ICICI Lombard -- completed their IPO issues that hold hopes for the respective banks in tackling their non-performing assets (NPA) issues better. 

Alka Anbarasu and Jason Sin, analysts at Moody's Investor Services said, “The initial public offerings (IPOs) of these banks’ insurance subsidiaries are credit positive because the banks will receive proceeds that will strengthen their loss-absorbing buffers.”

SBI Life, which launched its IPO on September 20, got oversubscribed by 3.58 times by receiving bids over 31.55 crore equity shares as against 8.82 crore equity shares offered.

ICICI Lombard introduced its issue September 15, bagged bids over 18.35 crore equity shares with an over-subscription of 2.98 times.

The duo at Moody's said, “The listings also unlock the value of the insurance subsidiaries for any future sell-down by the banks.”

Following the IPO, SBI Life is valued at Rs 70,000 crore ($10.8 billion) and ICICI Lombard holds valuation of Rs 29,500 crore ($4.5 billion).
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Moody's believe that SBI will use some or all of the gain to strengthen its loan-loss reserves for nonperforming loans (NPLs) and thereby limit pressure on its profitability.

It added, “The gain equals about 300 basis points of the bank’s NPLs as of June 2017, and will more than offset the additional provisioning required for the 12 large NPL accounts cited by the central bank in a June 2017 assessment.”

Based on SBI data, the central bank requires that SBI provide an additional Rs 3,540 crore of provisioning in fiscal 2018 (which ends March 2018) for these 12 accounts.

As for ICICI Bank, the agency said, "This will be accretive to ICICI’s capital position and will strengthen its ability to absorb any increases in credit costs in fiscal 2018 (which ends March 2018)."

In the first quarter of FY18 (Q1FY18), SBI's gross NPA rose to 9.97% compared to 6.90% in Q4FY17, In Q1FY17, gross NPAs of SBI alone stood at 6.94%. While ICICI Bank's gross NPAs jumped to 7.99% in Q1FY18 versus  7.89% in Q4FY17 and 7.20% in Q1FY17.

Although Moody's expects the banks to retain their majority stakes in their insurance subsidiaries, selling the stakes provides a potential source of capital should there be acute solvency stress. 

SBI’s remaining 62.1% stake in SBI Life is worth around Rs 43,500 crore - which equals approximately 22.4% of SBI’s common equity Tier 1 (CET1) capital as of June 2017. 

ICICI’s remaining 55.9% stake in ICICI Lombard is worth around Rs 16,500 crore - about 17.5% of the bank’s CET1 capital as of June 2017.

Also, ICICI has 54.9% stake another insurance subsidiary ICICI Prudential Life Insurance - which currently is worth Rs 31,000 crore -  about 32.8% of the bank’s CET1 capital as of June 2017.

Pace for insurance companies opting for IPO looks good ahead. Apart from ICICI Lombard, Reliance General Insurance (RGI), on June 12, 2017 said that its board approved the IPO. It expects the listing to complete by FY18.

Finance Minister Arun Jaitley, in January 2017, approved listing of five state-owned general insurance companies -- New India Assurance, Oriental Insurance, National Insurance, United India Insurance and national reinsurer General Insurance Company.

The government plans to earn $1.63 billion (Rs 10,500 crore approx) worth of stakes in PSU general insurance companies.