Non-core assets are investments by banks not related to lending and borrowing. These include strategic investments in the equity of other companies, holdings in subsidiaries and joint ventures.
The country’s largest lender, State Bank of India (SBI), is valuing its holdings in different entities and is looking for opportunities to unlock capital but it is not in a hurry to sell, chairman Arundhati Bhattacharya told Mint over the phone on Friday.
“These things cannot be done fast. We have to discover value. There is no reason for us to do a fire sale, we are not in that position," Bhattacharya said.
Following the bank’s third quarter earnings release on 11 February, Bhattacharya said that the bank would be looking to offload non-core assets as one of the options to raise capital.
SBI’s holdings in its various subsidiaries and joint ventures were pegged at ₹ 9,781 crore as of March 2015, according to the bank’s annual report. Some of its non-core assets include a 26% stake in Clearing Corp. of India (CCIL), 10.9% shareholding in National Stock Exchange (NSE) Ltd, 6.42% stake in Infrastructure Leasing and Financial Services (IL&FS) Ltd and 9.57% in Central Depository Services (India) Ltd (CDSL).
To be sure, SBI is not in urgent need of capital and can afford to wait until an appropriate time. The bank’s capital to risk-weighted assets ratio (CRAR) was at 12.45% as of 30 December and its tier-I ratio was 9.64%. Present norms under Basel III require banks to maintain a minimum total CRAR of 9% and a tier-I ratio of 7%.
Other public sector lenders such as Bank of Baroda, IDBI Bank and Punjab National Bank may also benefit from sales of non-core assets.
Bank of Baroda’s non-core holdings include a 6% stake in Credit Information Bureau (Cibil) Ltd, 5.07% shareholding in depository firm CDSL and 5.34% in Assets Care and Reconstruction Enterprise (ACRE) Ltd, an asset reconstruction company.
In an interview with Mint last week, managing director and chief executive officer P.S. Jayakumar said that Bank of Baroda would not ask for capital from the government and is looking at selling non-core assets as one of the options to unlock capital over the next 12 months. The bank’s tier-I capital took a knock following a surge in bad loans and provisions in the December quarter and is currently at 9.57%.
In the case of Punjab National Bank, non-core assets include a 10% and a 15.30% stake in Asset Reconstruction Company (India) Ltd and ACRE, respectively. Its tier-I capital was at 8.52% as of December 2015.
This is the right time for banks to unlock capital from non-core holdings, said an investment banker.
“Most of these investments are top-tier assets. In my view, it is a very opportune time for public sector banks to unlock value from these investments and use the resultant capital to buttress their balance sheets," said Ritesh Chandra, executive director and head (consumer, FIG and business services group) at investment bank Avendus Capital.
Chandra added that bank boards must stop dithering on the sale of non-core assets and put a transparent process in place to offload their stake in these assets.
Bankers, however, are not convinced that the process will be an easy one. “These are unlisted assets. Even if banks find out the valuation, which can be done by investment bankers, how do we find an investor? And these are bulk quantities of stake sale. Finding an investor in the present market scenario becomes tough and this is why the exercise is taking time," said R.K. Takkar, managing director and chief executive officer at UCO Bank.
“To get a good valuation and to get a buyer at that valuation is a challenge," said Takkar.
Lack of buyers and valuation concerns have prevented quick exits from investments in entities like NSE. Investors, including SBI, are pitching for a listing of the exchange which will provide an easier exit route.
Pradeep Kumar, managing director of Barclays Capital India, agrees that listing of some of these bank-sponsored entities is the best option.
“The easiest way forward would to be to go for listing of these businesses, like in the case of CARE and CRISIL," said Kumar, adding that businesses which have good profitability and growth will be attractive to investors.
Banks acted as seed capital providers in the case of a number of companies created under special provisions by the government and the Reserve Bank of India. These companies, including NSE, Unit Trust of India, CCIL, Cibil, Stock Holding Corporation of India Ltd, CDSL, CARE and IL&FS, were established as financial market intermediaries. Given that these entities have now grown to be independent and self-sufficient, lenders can look to exit or at least dilute their stake.
Public sector banks will need to raise a total of ₹ 3.3 trillion in tier-I capital between fiscal 2016 and 2019, according to rating agency ICRA. The government has committed to infuse ₹ 70,000 crore into lenders over this period, but most expect this amount to be increased in light of the exercise to clean up bad loans.