Will IDBI Bank stake sale pave the way for reducing govt stake in other PSBs?

Finance minister Arun Jaitley, in his budget speech, indicated that the government will consider reducing the stake in IDBI Bank Ltd to less than 50% from 80.2% currently.

A closer look at data collected by Mint shows there are at least 24 banks in which the government has more than 50% stake. Will the stake sale in IDBI Bank pave the way for the government to reduce its stake in other public sector banks (PSBs)?

Firstly, the PSBs are trading at very cheap valuations as you can see from the chart. The current price-to-book ratios for most PSBs is 0.2-0.4. The current market capitalization of PSBs forms just 29% of the total market cap of all the banks. Even if the government sells its stake in all PSBs, it will only be able to raise ₹ 34,146 crore, which is just one-third of their capital requirement.

Recently, rating agencies such as Icra Ltd and Crisil Ltd downgraded the debt instruments of around seven to eight PSBs, reflecting their weak credit profile. The valuations of PSBs may not recover in a hurry as they are saddled with a higher proportion of bad debt and non-retail loan book. Given these constraints, it may be difficult for these banks to attract institutional investors.

This was already seen in the tepid institutional response during road shows for IDBI Bank’s qualified institutional placement. Note that IDBI Bank posted a net loss of ₹ 2,184 crore, the highest ever, in the December quarter, following the Reserve Bank of India’s clean-up exercise. Provisions quadrupled and gross bad loans jumped by more than half in the three months ending December, compared with a year ago.

True, the government has seen interest from strategic partners such as the World Bank’s International Finance Corp., US private equity firm TPG Capital and UK development finance institution CDC Group Plc for buying IDBI Bank’s stake. However, by getting a strategic partner, the government may lose management control of the bank as it will have to offer board seats to strategic investors.

While this might be fairly easy in the case of IDBI Bank, the government cannot cede control of other PSBs without going through Parliament, which could take a long time, said Vibha Batra, senior vice-president at rating company Icra.

Lastly, there is a strong market buzz about the consolidation of 27 PSBs into six, under anchor banks, after discussions at the Gyan Sangam bankers’ retreat. The six anchor banks are expected to be State Bank of India, Bank of Baroda, Punjab National Bank, Bank of India, Canara Bank and Union Bank of India.

Clearly, investors would not want their majority holdings turn into minority, so the government stake sale may only happen after consolidation. Which means reducing the sovereign stake in PSBs may be a long-drawn process. Moreover, it may not be easy as the government will have to deal with opposition from bank unions against consolidation and privatization. The IDBI Bank union has already called a strike.