New Delhi has weak hand in bank deal frenzy

MUMBAI: A dealmaking boom in India’s banking sector has an unlikely loser: the government. Canadian insurance holding firm Fairfax Financial, opens new tableads, opens new tab the race to buy a 61% stake from Indian state entities in $13 billion IDBI Bank, opens new tab, Bloomberg reported in February, citing sources.

An $8 billion transaction would be the largest-ever foreign direct investment in a local bank. But crystallising a premium valuation looks challenging.

A deal would complete a full circle for the lender hardest hit by an asset quality crisis: in 2018, bad loans comprised nearly one-third of its portfolio. Provisions for that sour pool eroded its capital base and prompted New Delhi, which then owned 86% of IDBI, to press state-backed Life Insurance Corporation, opens new tab to pump in 216 billion, opens new tab rupees, or $2.4 billion at current rates, to raise its 8% ⁠stake to 51% in 2019.

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LIC now holds 49% of IDBI’s shares and the government owns 45%. Selling a 30% stake to Fairfax at the latest market price would fetch the insurer a 136% return on its 2019 investment. New Delhi would be worse off, though: the lender’s shares trade lower than they did 13 years ago.

Yet even current multiples may be difficult to fetch. IDBI’s shares are trading at about 2 times forward book value, almost twice that of similar-sized rivals Yes Bank, opens new tab and IDFC First Bank, opens new tab. Throwing in employee liabilities, restructuring costs and the likely absence of indemnity clauses gives the buyer a strong case for a discount.

An abundance of takeover targets has hurt New Delhi, too. Launched in 2022, the slow-moving sale process of IDBI prompted early potential bidders to look elsewhere: last year Sumitomo Mitsui ⁠Banking Corporation , opens new tab bought a 24% stake in Yes Bank.

With Emirates NBD, opens new tab still in the reckoning with Fairfax, it’s a two-horse race to own IDBI. Both bidders already have a foothold in India’s credit market: the Dubai-headquartered lender is set to take control of the $2 billion RBL Bank, opens new tab and Fairfax owns $675 million CSB Bank, opens new tab.

That chips away at any shred of bargaining power left with the sellers, who can hardly demand a control premium. Regulations cap voting ⁠rights of private bank shareholders at 26%. That puts the new owner effectively at par on voting decisions with LIC and the government, which will hold a combined 34% after the sale. To maximise takings, officials could ask the central bank to relax the voting rule. The other option is ⁠to reduce their total stake to well below 26%.