Sitharaman's Budget 2020: Investor support may not sustain for IDBI Bank

Though the Union Budget failed to impress the Street, it did revive investor sentiments in some beaten down stocks, such as IDBI Bank. Following the finance minister’s proposal of selling government stake in IDBI Bank, the stock of private-sector lender rallied 17.6 per cent on Saturday before ending the day with 10 per cent gains at Rs 37.3 apiece. 

What cheered investors toward IDBI Bank stock is the expectations of improvement in overall health and valuation amid a likely privatisation of the lender. However, the rally may not sustain, suggest analysts and experts.

According to Sunil Jain head of research at Nirmal Bang, “It’s a short-term impact, which is unlikely to continue given the bank’s balance sheet position.” And the government-owned Life Insurance Corporation of India (LIC) also has a controlling stake, he added.

It means, even after the stake sale by the government, which holds 47.11 per cent as of December 2019, the government’s influence could still continue, albeit indirectly. This is because, Life Insurance Corporation, which was asked by the government to take stake in the bank in 2018, has 51 per cent stake as of December 2019.

This apart, the bank’s current balance sheet position is far from comforting. As per IDBI Bank’s September 2019 quarter updates, it still has the highest gross non-performing asset (NPA) ratio in the banking industry of 29.4 per cent and had reported a net loss of Rs 3,459 crore for the quarter. Its net NPA though stood at 5.97 per cent at the end of September quarter.

An analyst from a domestic broking house though still believes that even if the bank has become private, significant improvement in its financial health looks unlikely in the foreseeable future. 

The bank is expected to come out of the Reserve Bank of India's prompt corrective action (PCA) framework by March 2020, with its net NPA slipping below six per cent. A bank/lender is placed under PCA when it shows a weak profile on capital adequacy, asset quality and profitability fronts.

In the above backdrop, investors are recommended to stay away from the stock unless the balance sheet position improves.