Earlier this week, state-run SBI Life Insurance (SBI Life) completed its initial public offer (IPO) issue, while the privately-run ICICI Lombard did the same last week.
“The initial public offerings (IPOs) of these banks’ insurance subsidiaries are credit-positive because the banks will receive proceeds that will strengthen their loss-absorbing buffers,” Moody’s Investor Services said in a note released in Singapore.
“The listings also unlock the value of the insurance subsidiaries for any future sell-down by the banks,” it said.
The SBI Life IPO was oversubscribed by 3.58 times, receiving bids for over 315.5mn equity shares as against 88.20mn shares offered.
ICICI Lombard received bids for over 183.50mn equity shares, which signified an over-subscription of 2.98 times.
“We expect that SBI will use some or all of the gain to strengthen its loan-loss reserves for non-performing loans (NPLs) and thereby limit pressure on its profitability,” Moody’s analysts Alka Anbarasu and Jason Sin said in the note.
“The gain equals about 300 basis points of the bank’s NPLs as of June 2017, and will more than offset the additional provisioning required for the 12 large NPL accounts cited by the central bank in a June 2017 assessment,” it added.
The Reserve Bank of India (RBI) has identified 12 large accounts with exposure of more than Rs50,000mn and more than 60% of which was recognised as NPAs. Following the passing of the Insolvency and Bankruptcy Code (IBC), banks have to refer to the IBC for these accounts.
The accumulated NPAs of state-run banks went above a staggering Rs8 lakh crore at the end of the last financial year.
As per State Bank of India (SBI) data, the RBI requires the state-run bank to provide an additional Rs35,400mn of provisioning during the current financial year for these 12 accounts.
After the IPO, SBI Life is valued at Rs700,000mn ($10.8bn) and ICICI Lombard at Rs295,000mn ($4.5bn).
The gains of this IPO “will be accretive to ICICI’s capital position and will strengthen its ability to absorb any increases in credit costs in fiscal 2018 (which ends March 2018),” Moody’s said.
While the rating agency expects these banks to retain their majority stakes in their insurance subsidiaries, selling the stakes provides a potential source of capital should there be acute solvency stress.
SBI’s remaining 62.1% stake in SBI Life is worth around Rs435,000mn, which approximately equals 22.4% of SBI’s common equity Tier 1 (CET1) capital as of June 2017.
ICICI’s remaining 55.9% stake in ICICI Lombard is worth around Rs165,000mn, which is around 17.5% of the bank’s CET1 capital as of June 2017.
ICICI also has 54.9% stake in another insurance subsidiary – ICICI Prudential Life Insurance – which is currently worth Rs310,000mn, and equivalent to 32.8% of the bank’s CET1 capital as of June 2017.
