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LIC’s merger move could prove more fatal?

From the recent merging idea, behind the Central Big Bank, the idea only seems to be more inclusion of the demotions.

LIC, that has seen its investment in IDBI Bank (classified as a private bank now) erode by more than half over the past year or so, has also seen the value of its investments in other PSU banks plunge. The sharp fall in the price of PSU bank stocks and dilution of its stake owing to capital infusion by the government, has eroded its wealth in these banks. LIC has lost over Rs 17,000 crore of its wealth in PSBs over the past year. Excluding IDBI Bank, it has lost over ₹4,800 crore in other PSBs.

The insurance giant merger move would only hurt the insurer more in the coming months. A sharp 20-30 per cent dilution in the book value of the merged entities — PNB, Canara Bank, Union Bank and Indian Bank — over the next year or so, will lead to LIC’s value of holdings in PSU Banks erode further.

 

Why the Infusion is a terrible mark of valuation?

The investors who play a major role in the value of a bank’s capital, the turn over only seems to be demoting in the public eye for odds. However, it is the merging of capital that will clearly bring in no employment to the freshers entering the bank sector. The government infusing capital year after year into public sector banks, has eroded value for investors. This is because most PSU banks trade at a steep discount to their book value, and hence the government infusing capital at such low valuations, immediately leads to dilution in equity base.

And then the shareholders!

In FY19, the Centre infused ₹1.06 lakh crore into banks, most of which were trading at 0.4-0.6 times their book value. The dilution in book value owing to the government’s capital infusion has hurt minority shareholders including LIC.

A situation such as, in case of Corporation Bank, the government infused ₹11,641 crore in FY19. For this, it was allotted shares in the bank in two tranches — 86.9 crore shares at ₹29.4 each in October 2018 and 340 crore shares at ₹26.68 in March 2019. The book value of the bank in the December 2018 quarter stood at ₹54.9 (as per the bank’s presentation) — double that of the price at which shares were issued.

 

When liquidity takes a drastic hit!

You know what to expect! LIC that was holding 13 per cent stake in Corporation Bank as of June-Sept 2018 (before the infusion) saw its stake in the bank fall to just 3.6 per cent by end of FY19. The huge dilution in its stake alongside a sharp fall in stock price during this period, led to substantial fall in its value of holdings.

 

The tight infusion is quite an example of again, in the case of Oriental Bank of Commerce, LIC’s stake has fallen from 7.4 per cent last June to 3.4 per cent currently. The government had infused about ₹6,600 crore into the bank in FY19.

 

Now we talk numbers!

Hell no! 17000 crores, oddly anything at to be worries about!

In the recently announced PSU bank mergers, LIC could again lose wealth in these banks. This is because, there could be a sharp 20-30 per cent dilution in the book value of the resultant merged entity. LIC is among the minority shareholders that holds stakes in these PSU Banks — in PNB for instance, LIC owns 7.3 per cent stake, while in Union Bank, it holds 6.4 per cent stake.

Post merger, LIC’s stake in these banks could come down significantly to 3-5 per cent.

 

And the fiasco!

LIC had stepped in to bail-out IDBI Bank last fiscal, infusing a massive amount of ₹21,624 crore and acquiring 51 per cent stake in the bank.

With the current price of IDBI Bank less than half the price at which LIC was allotted shares in the bank (₹60-61), the insurer has already lost over half of the value of its investments.

Owing to rise in slippages and huge provisioning, IDBI Bank’s Tier-1 capital ratios fell sharply in the June 2019 quarter, failing to meet the RBI’s regulatory requirement.

The ₹9,300 crore capital infusion into IDBI Bank, which trades at a sharp (0.5 times) discount to its book value, would lead to about 10 per cent dilution in the book value, hurting LIC. 

 

The under-performance and requirements for further capital infusion in the coming months would only accentuate the pain for the largest life insurer.

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