IDBI Bank Stake Sale: Where Do The Bidders Stand?

Whether bidders submit a financial bid or not will depend on what they find in the data room. For now, the expectation is that bids should come in within 60–90 days, and the winning bid will be decided before March 2025.

While the process will continue as planned, it would be relevant to see the questions each bidder will grapple with and the opportunity it has in buying IDBI Bank.

Buyer's Remorse?

Watsa's Fairfax Financial will probably ask itself what it intends to do with the IDBI Bank franchise. Especially because of its 40% stake in CSB Bank. Relatively speaking, IDBI Bank is on stronger footing in terms of the scale of its operations. But CSB Bank has greater growth potential.

Back in 2018, the Reserve Bank of India allowed Fairfax Financial to buy a controlling stake in Catholic Syrian Bank as a way to save the Indian lender. Following that, the lender changed its name to CSB Bank, got itself listed, and has since been fixing the bank's core issues.

As of June 30, CSB Bank's advances stood at a little over Rs 25,000 crore, up 18% year-on-year, while deposits were at Rs 29,920 crore, up by 22%. The lender's corporate book constituted only 23% of total loans, while gold loans accounted for 50%. As of June 30, term deposits were at Rs 22,471 crore, and low-cost current account savings account deposits were at Rs 7,449 crore.

The gross non-performing asset ratio was at a tight 1.69%, while the net NPA stood at 0.68%. Asset quality did worsen sequentially but remained resilient. The return on assets was 1.27%, while the return on equity was 12.69%.

Compare that with what IDBI Bank brings to the table. Advances of Rs 1.94 lakh crore are up 17%, and deposits worth Rs 2.77 lakh crore are up 13%. Retail net advances rose 20% year-on-year to Rs 1.36 lakh crore. Retail deposits were at Rs 97,044 crore, up 9% from a year ago.

The gross NPA ratio was 3.87%, while the net NPA was 0.23%. The RoA for IDBI Bank was 1.83%, and the RoE was 19.87%.

In terms of valuation, CSB Bank carries a price-to-book value of 1.35 times over its one-year forward earnings. IDBI Bank's price to book stands at two times.

Depending on who blinks first, either IDBI Bank will merge with CSB Bank or vice versa. In the first scenario, the exchange ratios favour Fairfax Financial, while the government stands to win in the second.

Will Fairfax Financial remain interested in playing ball? That is the second question it will need to answer.

A Distracted Lender

Kotak Mahindra Bank is in the midst of dealing with the fallout of the RBI's restrictions placed in April. The regulator barred Kotak Mahindra Bank from taking on new customers through the digital route while also barring the issuance of fresh credit cards.

This was because the RBI found material deficiencies in the lender's IT infrastructure. Kotak Mahindra Bank is now tasked with fixing these issues before the restrictions can be lifted. While the bank maintains that it is working on war footing, there is no definite timeline for the resolution.

The restrictions are also an acid test for its new MD and CEO, Ashok Vaswani, who took over the role in January 2024.

In his maiden letter to shareholders, released as part of the bank's FY24 annual report, Vaswani talked about how Kotak Mahindra Bank was transforming for scale.

"Equally important while transforming for scale would be to scale for relevance and not for the sake of size," Vaswani said.

Does Kotak Mahindra Bank want to get into a large merger when its management bandwidth is tasked with a transformation while also removing regulatory censure? That's the first question for the lender.

Vaswani's past track record of transforming 300-year-old Barclays into a modernised lender without the distractions of inorganic growth, suggests otherwise.

The Foreign Contender

For Emirates NBD, a successful bid for IDBI Bank could prove to be a massive boost in one of the world's fastest growing markets. The UAE-based lender has been present in India for years but only has three branch offices.

Including fund- and non-fund-based exposures, Emirates NBD India reported a gross outstanding credit of Rs 5,759 crore as of December 31, 2023. Of this, Rs 3,491 crore goes towards services sector borrowers and the rest to manufacturing, according to Basel III disclosures from the lender state. The gross and net NPA ratios were zero.

Off the bat, IDBI Bank would give the foreign lender entry to India's lucrative retail lending business. A successful acquisition would also provide access to a network of over 2,000 branches and 3,300 ATMs. IDBI Bank's history and expertise as an infrastructure lender could allow Emirates NDB to participate in India's long term macroeconomic growth.

To be sure, foreign banks in India have had limited success, partly due to tougher local regulations, volatile global businesses, and perception issues. Citi, one of the most successful foreign lenders here, had to eventually sell its India consumer banking business to Axis Bank.

If it wins the bid, will Emirates NBD be able to convert the opportunity into success? What will be the cost of transforming IDBI Bank into a truly world class institution? With the government and LIC still holding some stake, is IDBI Bank even worth the hassle? These are the questions the UAE-based lender has to answer.

To be sure, Emirates NBD is also in discussions with Yes Bank to acquire a controlling stake in the private sector lender. While the discussions with Yes Bank are still in their early stages, how Emirates NBD weighs the two bids will be the next big thing to watch for.