Global brokerage house Credit Suisse turned bearish on LIC Housing Finance, which fell more than 5 percent intraday on February 18.

The stock has corrected more than 22 percent in the last month. It was quoting at Rs 362.60, down Rs 17.25, or 4.54 percent, on the BSE at 1022 hours, while IDBI Bank was down over 2 percent.

The research house downgraded its rating on the stock to underperform from outperform and also slashed price target by 36 percent to Rs 320.

“The possibility of merger with IDBI Bank will remain an overhang. A merger could dilute its positioning as an efficient mortgage financier,” it said.

Given the track record of IDBI Bank, the merger would be likely negative for the company’s investors, Credit Suisse said.

But, another brokerage house Macquarie maintained its outperform call on the stock, with a price target of Rs 550, implying a 45 percent potential upside from current levels. It says the stock is trading below its FY21 estimatesd book value, which offers some cushion.

However, uncertainties have been piling up for LIC Housing and talks of a merger with a weak bank can distract a lot of management bandwidth from growth towards integration, the research house said.

Life Insurance Corporation acquired a 51 percent stake in beleaguered lender IDBI Bank in FY19. As part of the takeover approval, the RBI imposed certain conditions on LIC, most notably that “housing finance activity shall be conducted by only one entity, i.e. either IDBI Bank or LIC Housing; and appropriate reorganisation shall be completed within a period of 5 years”.

The RBI does not incrementally permit similar lending activities to be carried on in two different entities within the same group.

On February 17, a media report cited senior executives as saying that LIC may not wait another four years (time allowed by RBI) to decide on a merger. “LIC is waiting for IDBI Bank to come out from the RBI’s Prompt Corrective Action (PCA) framework to begin exploring reorganisation,” the report quoted them as saying.

But LIC denied the merger news, saying there was no proposal to merge its subsidiary LIC Housing with any other entity, PTI reported.

IDBI was kept under PCA starting May 2017 when its NPLs topped 16.7 percent.

“IDBI has now undergone 12 quarters of losses and shored up its coverage ratios sufficiently to over 86 percent (gross NPA of 29 percent but net NPA of only 5 percent), is adequately capitalized (over 10 percent CET-1) and is expected to start reporting PBT profits from next quarter. Hence, IDBI’s exit from the PCA framework would be only 1-2 quarters away, in our view,” said Macquarie.

Why is this negative for LIC Housing Finance?

“IDBI is a relatively weak universal bank with (so far) demonstrably poor underwriting. Its loan book of Rs 1.7 lakh crore is split 55-45 retail-corporate with around 25 percent of loans being home loans, compared to LIC Housing’s AUM of Rs 2.1 lakh crore (all but 6 percent of which is retail loans),” Macquarie said. “The business models are not particularly compatible in our view and will distract a lot of bandwidth for integration and scaling up deposit franchise to refinance LICHF’s bank loans and market borrowings.”

According to the brokerage, return ratios are likely to take a hit for the medium term. “Synergistic cost of funds benefits by & large will be offset by regulatory requirements of SLR & CRR under the bank structure,” it said.

Will it be easy to get merger approval?

LIC owns 51 percent of IDBI Bank and 47 percent is owned by the government. LIC owns 40 percent stake in LIC Housing and the rest is fragmented.

“Since LIC is a related party, it is disqualified from voting and the merger will require ‘majority of minority shareholders’ approval to go through. Given fragmented public shareholding in LIC Housing, we think it will be hard to build consensus & get shareholder approval,” Macquarie said.


By Loknath

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