The sale of stake by few Indian banks in their insurance arms is credit positive for these lenders as the proceeds received would strengthen their loss-absorbing buffers, Moody’s said. Earlier this week, State Bank of India’s life insurance subsidiary, SBI Life Insurance, listed its shares on the Bombay Stock Exchange, less than a week after ICICI Lombard General Insurance (ICICI Lombard), the general insurance subsidiary of ICICI Bank did the same. “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,” the report said.
The listings will also unlock the value of the insurance subsidiaries for any future sell-down by the banks, it added. “Although we expect the 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,” the report said. Following the IPO, SBI Life is valued at Rs 70,000 crore (USD 10.8 billion). SBI sold 80 million shares or an 8 per cent stake and will record a gain on the sale of about Rs 5,520 crore. “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,” the rating agency said.
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. As per the RBI norms, SBI will be required to provide an additional Rs 3,540 crore of provisioning in FY18, for these 12 accounts. SBI’s remaining 62.1 per cent stake in SBI Life is worth around Rs 43,500 crore, which equals around 22.4 per cent of the public lender’s common equity tire I (CET1) capital as of June 2017. ICICI Lombard is valued at Rs 29,500 crore (USD 4.5 billion). ICICI sold 31.8 million shares or a 7 per cent stake, and will record a gain on the sale of about Rs 1,970 billion.
This will be gradually added to ICICI’s capital position and will strengthen its ability to absorb any increases in credit costs in FY18, the report said. ICICI’s remaining 55.9 per cent stake in ICICI Lombard is worth around Rs 16,500 crore and equals about 17.5 per cent of the bank’s CET1 capital as of June 2017. ICICI also has a 54.9 per cent stake in listed life insurance subsidiary ICICI Prudential Life Insurance, which as of September 27, was worth Rs 31,000 crore and equals about 32.8 per cent of the bank’s CET1 capital as of June 2017.