Insurance subsidiaries come to the rescue of banks  in  their  hunt for capital


  • In the quest for capital, the country’s largest lenders are being helped, to a small extent, by unlocking value in subsidiaries
  • Credit Suisse has estimated that Indian banks would need close to $20 billion in capital in FY21
  • Indian lenders are gearing up to raise capital, with the pandemic expected to hit asset quality in the current year. State Bank of India (SBI) will seek the approval from its shareholders to raise ₹20,000 crore, while HDFC Bank plans to raise ₹50,000 crore. Their private sector peers, too, have announced similar plans.
  • In a 26 May report, Credit Suisse analysts estimated that Indian banks will need $20 billion in fiscal year 2021.
  • Some of the largest lenders are unlocking value in subsidiaries. ICICI Bank sold stake in both its general and life insurance subsidiaries. The private sector lender raised ₹840 crore by divesting its stake in ICICI Prudential Life Insurance Company Ltd.

The lender has also offloaded stake in its general insurance arm and raised ₹2,250 crore.

ICICI Bank’s capital adequacy ratio stood at 16.1% as of March against the minimum regulatory requirement of 9%. It may seem that the lender does not need capital. But the uncertainty on asset quality due to the pandemic has been a key motivation to raise money.

Also, the equity market is hardly reflecting all the concerns surrounding the pandemic, making it prudent to take advantage of valuations right now.

While ICICI Prudential Life Insurance Co.’s shares have fallen about 15% so far this year, they trade at a 23.5% premium to the initial public offering price of 2016.

The largest private life insurer, SBI Life Insurance Co., also came to the aid of its parent. SBI sold a 2.1% stake for an undisclosed sum earlier this month.

However, at a floor price of ₹725 apiece, the public sector lender would have got ₹1,525 crore. To be sure, the sale was prompted by the need to comply with regulatory requirements for minimum public shareholding.

SBI’s capital adequacy ratio, too, is a healthy 13.1%. Its management said the bank does not need capital this year.

“The biggest uncertainty is what will happen once the moratorium on loans concludes in August. There will be a need for capital for all banks,” said an analyst, requesting anonymity.

Banks have extended the moratorium to all borrowers for six months. Most lenders have at least a quarter of their loan book under moratorium.

Moreover, the regulator has asked banks to conduct a stress test of their balance sheet in the wake of the pandemic, according to a report in Business Standard.



Source: Livemint


Date: 23rd June, 2020


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