Hunting for value in PSU banks

The core performance of public sector banks has been dismal. But if investors look deeper, there’s treasure to be found in their non-core investments.



The biggest ever fire sale of Indian corporate assets is on. With banks cracking the whip at large corporate defaulters, many of them have been forced to sell their prized assets to repay their debt.

But just as India Inc’s asset fire sale is the best hope for NPA-ridden banks, offloading some of their own non-core investments can help capital-crunched public sector banks cut their losses.

Recently, Canara Bank sold its 8.9 per cent stake in CARE Ratings for ₹435 crore. This is nearly half the sum the bank received in 2016-17 from the Centre by way of capital infusion. Bank of India, too, sold its 18 per cent stake in Star Union Dai-ichi Life Insurance during FY17 for ₹540 crore. This was about a third of the amount infused by the Centre into the bank last fiscal.

With asset quality continuing to deteriorate and banks initiating insolvency proceedings against large defaulters, provisioning requirement is bound to rise sharply. PSU banks can no longer depend on the Centre’s largesse alone. The million-dollar question is — can banks fend for themselves?

Sifting through the annual reports of all the PSU banks suggests that many have significant holdings in non-core businesses that can help raise additional capital. We dug out information on banks’ non-banking subsidiaries, joint ventures/associates and other investments (wherever disclosed) to find out how much value could be unlocked.

Our findings show that many banks have notable investments in insurance businesses, asset management companies and housing finance companies that can be monetised to raise a tidy sum. All they have to do is to keep their powder dry and wait for the opportune time to offload these investments at a handsome price.

Filtering down

Interestingly, most of the 21 listed PSU banks have non-core investments that can be monetised at some time. Oriental Bank of Commerce, for instance, has a 23 per cent stake in Canara HSBC OBC Life Insurance, while Union Bank of India has 25 per cent stake in Star Union Dai-ichi Life Insurance and 100 per cent stake in Union Asset Management, among other investments.

Allahabad Bank has a 30 per cent holding in Universal Sompo General Insurance and Andhra Bank and Bank of Baroda have a 30 per cent and 44 per cent stake, respectively, in India First Life Insurance.

With many IPOs by insurance players set to hit the market this year, value unlocking from these investments can be sizeable, depending on how robust and scalable these businesses are.

The list on PSU banks having substantial holdings in insurance and other businesses runs endless. For ease, we have filtered down five PSU banks, based on the extent of their holding and potential value in other businesses. Do note that the list is not exhaustive as we have considered key investments (not all) of these banks. Also, we have been conservative in our valuations.

Also, the stocks discussed in this article should not be construed as recommendations. The value per share of many of these banks’ non-core businesses is minuscule in comparison to the intrinsic (fair value) price of the stock. Hence, investors should not expect significant upsides based on their SOTP (sum-of-the-parts) value.

State Bank of India

India’s largest bank, SBI, got bigger in April this year, as it merged its five associate banks with itself. But near-term concerns persist. The real worry for the bank is the consolidated picture on asset quality. While SBI’s standalone gross non-performing assets (GNPAs) stood at 6.9 per cent of loans as of March 2017, the tally for its subsidiaries stood at 15-25 per cent of loans.

But monetising non-core assets will help it raise capital and unlock value.

Non-core value: SBI’s non-banking subsidiaries with notable earnings include SBI Capital Markets and SBI DFHI in which the bank holds 100 per cent and 63.8 per cent (group holding 72 per cent), respectively.

SBICAPs offers investment banking and corporate advisory services. The company posted a profit after tax of ₹252 crore in FY17. SBI DFHI is one of the largest standalone primary dealers. The company posted net profit of ₹176 crore in FY17. These are valued at a price-to-earnings basis.

However, the real value unlocking will come from its insurance ventures. SBI Life, in which SBI has 70 per cent holding, has gained significant market share over the past year. The company ranked number one among private players in terms of new business premium in FY17. SBI Life’s new business premium grew by 43 per cent in FY17, above industry growth of 24 per cent.

Deals in the life insurance space have taken place at one to three times the embedded value of the life insurance business. But valuations of life insurance companies have seen substantial re-rating post the HDFC-Max merger announcements and the IPO of ICICI Pru Life.

In December 2016, SBI sold its 3.9 per cent stake in SBI Life for ₹460 a share which valued the insurance company at ₹46,000 crore, about 3.5 times its embedded value. SBI Life has filed for IPO with SBI planning to offload about 8 crore shares or 8 per cent stake (as per reports). This could lead to significant value unlocking for SBI.

In SBI General Insurance, SBI has a 74 per cent stake. But the company does not rank among the top players. In fact, it only turned profitable for the first time in FY17, reporting a profit of ₹153 crore. The company’s gross written premium (GWP) stood at ₹2,607 crore for FY17, with growth of 27.7 per cent against an industry growth of 32.4 per cent. Deals in the general insurance space have happened at one to two times their gross written premiums or 14-16 times earnings.

SBI also has 63 per cent stake in SBI AMC, the fifth largest AMC in terms of AUM. In FY17, SBI MF’s AUM grew by 47 per cent YoY.

IDBI Bank

At the core level, IDBI Bank’s performance has been dismal. High net NPA and negative ROA also led the RBI to invoke corrective action against the bank recently. As of March 2017, the bank’s GNPA stood at 21 per cent of loans, while Tier I capital stood at 7.8 per cent. In 2016-17, the bank recorded a loss of ₹5,100 crore.

Non-core value: IDBI Federal Life Insurance is a life insurance company in which IDBI Bank has 48 per cent stake, Federal Bank 26 per cent and Ageas Insurance International 26 per cent. While the insurance company did see a robust 34 per cent growth in new business premium in FY17, its market share is at about 1.5 per cent among private players.

Since the embedded value of IDBI Federal is not available, we considered the deal value pegged for the company in 2015, when there were reports of Ageas picking up 20 per cent stake in IDBI Federal for ₹800 crore. This pegs the value of the insurance company at ₹4,000 crore.

Given that IDBI Federal has not improved its market share since then, these valuations can be used as a benchmark. This also works out to 5 times its book value — ICICI Pru Life trades at about 8.6 times its FY17 book. Life insurers with scale, balanced product portfolio and diversified distribution model will drive premium valuations — SBI Life, HDFC Life, Max and ICICI Pru Life and Kotak Life being some of them. We have valued IDBI Federal at 4 times book.

IDBI Bank also has 30 per cent stake in NSDL (promoted by NSE), which is one among the two depositories in India. CDSL (promoted by BSE), which recently came out with an IPO, made a spectacular debut, more than doubling from its listing price. We have, however, been conservative and considered a much lower multiple to value IDBI Bank’s stake in NSDL.

IDBI Bank also has stakes in NSDL e-governance Infrastructure, Biotech Consortium India and North Eastern Development Finance, which have been difficult to value due to limited information.

IDBI Bank also has a 100 per cent stake in IDBI AMC. The AMC, however, ranks low among the fund houses in terms of AUM (₹7,337 crore as of June 2017). Hence we assign a lower valuation.

Canara Bank

Canara Bank is another PSU bank that has been weighed down by asset quality concerns. As of March 2017, the bank’s GNPA stood at 9.6 per cent of loans and return on asset at a meagre 0.2 per cent.

Non-core value: Canara Bank has a 51 per cent stake in Canara Robeco AMC, which has an AUM of ₹10,800 crore as of June 2017 (not among the top 10). The AMC has recorded a profit of ₹16 crore in FY17.

Canara Bank has a 30 per cent stake in Can Fin Homes, a South-based housing finance company, with a strong regional presence. Over the last three years, the company’s loan book has grown by a robust 32 per cent annually and its profit by about 46 per cent. We have valued Canara Bank’s holding at the current price after giving a discount of 30 per cent.

Canara HSBC OBC Life is a life insurance company in which Canara Bank has 51 per cent, Oriental Bank of Commerce 23 per cent and HSBC 26 per cent. The company saw a somewhat modest growth (14 per cent) in new business premium in FY17. Among private insurers, its share in new business premium was about 1.9 per cent in FY17. Since the embedded value is not available, we have priced it at 4 times book, similar to IDBI Federal.

Bank of India

Bank of India’s core business has been on a weak footing. As of March 2017, the bank’s GNPAs stood at 13.2 per cent of loans while its Tier I capital stood at 8.9 per cent. The bank ended FY17 with a loss of ₹1,558 crore. But the bank has some notable non-core assets that can come to its aid.

Non-core value: For instance, Bank of India is the largest shareholder with 30 per cent equity stake in STCI Finance, a non-deposit taking NBFC providing loans against shares, corporate loans against properties, construction finance and corporate loans. The company has a strong parentage with PSU banks (including BOI) holding 78 per cent stake. According to an ICRA report that has rated its long-term borrowing as AA, strong capitalisation, good profitability and comfortable asset quality are key positives. Exposure to risky segments, with real estate and promoter funding accounting for more than 80 per cent of the lending book, is a concern. We have valued the business at a conservative one time book.

Bank of India also has a stake in Star Union Dai-ichi Life Insurance. BOI holds 28.9 per cent, Union Bank 25 per cent and Dai-ichi Life Insurance Company holds 45.9 per cent. The company has a market share of just 1.3 per cent as of March 2017, in new business premium, which grew by a modest 7 per cent. Bank of India sold 18 per cent stake in the insurance company during FY17 for ₹540 crore. This values the insurance company at ₹3,000 crore.

Bank of India has other investments too, such as 5.5 per cent stake in CDSL, which had an excellent debut in the primary market recently. The bank also has 4 per cent stake in Tourism Finance, another listed stock. These have been valued at their market price with a 30 per cent discount. The bank has other investments including Equifax, NPCI, etc., which we have not valued due to limited information.

Bank of India has a 51 per cent stake in BOI AXA Investment managers, with AUM of just ₹4,013 crore as of June 2017 (not among the top 10).

Punjab National Bank

While the stock of PNB has had a good run over the past year, the bank is still in the woods. After reporting a huge loss of around ₹4,000 crore in FY16, the bank did end FY17 in the black, with a profit of ₹1,325 crore. But PNB’s GNPAs are still a steep 12.5 per cent of loans. A large bad loan book will likely keep provisioning requirement high, even in FY18.

Non-core value: PNB has 74 per cent stake in PNB Gilts which is the only listed primary dealer of debt securities in India. After a dip in FY16, the company’s profit scaled up significantly to ₹167 crore in FY17.

PNB also has a 21 per cent stake in Principal PNB Asset Management (investment manager to Principal Mutual Fund), which had AUM of ₹5,428 crore as of June 2017. The AMC ranks low among fund houses, in terms of AUM size.

PNB also has a 39 per cent stake in PNB Housing Finance, which came out with an IPO last year. The stock price has nearly doubled from its listing price. A strong parentage, robust growth in loans, high-ticket housing loan driven by presence in predominantly larger cities have kept earnings on a steady wicket.

PNB MetLife India Insurance, in which PNB has a 30 per cent stake, is among the top 10 insurance players in terms of new business premium. In FY17, the company’s premium grew by 14 per cent.

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