 "insurance")
The market cap of SBI Life Insurance is now 43 per cent of SBI's. The market cap of ICICI Pru is 21 per cent of ICICI Bank's, the market cap of HDFC Life is over 17 per cent of HDFC Bank's. The march past of insurance companies is getting to rub shoulders with that of the banking sector.
It could still be some time away, but do not be surprised if the number of insurance companies listed in the Sensex 50 and the Nifty overhauls the banks. Already compared to six banks in the list, there are two insurance companies. It will be three once Life Insurance Corporation gets listed either this year or at least in FY22.
SBI Life and HDFC Life could overtake their parents like Bajaj Allianz did to Bajaj Motors, says Praveen Gupta, former managing director and CEO of Raheja QBE General Insurance Company.
A year ago in the same period, the market cap of listed insurance companies as a percentage of the banks was much lower. This is significant because compared to October 2019, the shares of all the insurance companies are trading at a much lower value now, yet their share as percentage of the banks’ market cap has risen.
The impressive strides the insurance sector is making at the expense of the banking sector in India is thus remarkable. But this does not mean that the Reserve Bank of India and the Insurance Regulatory and Development Authority of India are about to trade places. What it more plausibly means is that the insurance sector could arrive more under the regulatory glare of the monetary authority. The banking sector is paying the price of acting as the key conduit for decades to push various government agendas, says Soumyajit Niyogi, Associate Director Credit & Market Research at India Ratings and Research. Whereas the insurance sector, once it was opened up, has been relatively free and is on the way to realise its huge potential, he explains.
For decades the pecking order in the Indian stock market has been fairly stodgy. After the advent of the IT companies in the noughties, no new blocks of companies had emerged to disturb the order. For instance, despite the arrival of the finch companies they have not breached the citadel of Sensex and Nifty. Of late, though, SBI Caps has made impressive inroads. SBI Caps' market cap is now half of that of the parent SBI but there aren’t any other payment company with such impressive rates of growth.
Among the sector constituents of the S&P BSE Sensex 50, the financial sector is the heaviest, at 35.27 per cent of the total value of the index. While this percentage is unlikely to change because of the arrival of the insurance companies, the relative weight of the banks vis-a-vis the insurance companies within the financial sector would alter significantly. Gupta does not expect there shall be more room for the banks to grow but the insurers will consolidate “at least till the demographic dividend lasts”.
What accounts for these changes? There are two factors. One is the persisting weakness of the banks, because of the weight of the non-performing loans they carry. This is the reason why, except for SBI, no other state-owned bank finds itself in the top league in the share market. The market cap of all state-owned banks is barely two thirds of the three listed life insurance companies--HDFC life, SBI life and ICICI Pru. Yet these banks account for close to 70 per cent of the deposit base in the country. Among both, the private and the state-owned banks, there are none which are massive and yet unlisted and could therefore create a sizeable wave in the market when listed. But most of the insurance companies are yet to be listed, including the largest of them all, LIC. Analysts expect it to be India’s largest company by market cap, reaching close to Rs 10 trillion. HDFC is less than Rs 7 trillion.
The other reason why the insurance sector is likely to steal a march over the banks is the nature of their business. The RBI has put a straitjacket over the spread of business which a universal bank can offer to its customers. This again is partly because of the bad loans these banks carry. The central government has recapitalised these banks to the extent of Rs 2.6 trillion over the past five years.
In contrast, the scope of business of the insurance companies is expanding rapidly. In the last decade (FY12 to FY20) the premium from new business of life insurance companies has risen at a compounded annual growth rate of 15 per cent. That of non-life insurance companies are shooting up even faster at around 24 per cent. This is to be expected in a developing country like India. As the per capita income of the population rises their need for more sophisticated financial products begins to rise. So life linked savings policies and policies covering health, motor, fire and marine insurance are getting snapped up fast. Covid galvanised the demand for term insurance, the long-term savings product, with some reports indicating a 40 per cent increased in its sales in this financial year, as well as of hospitalisation policies.
Again, unlike banks, the role of the central government has been mostly positive for insurers. Government schemes like Ayushman Bharat, the Pradhan Mantri Fasal Bima Yojana and the Pradhan Mantri Jeevan Jyoti Yojana has expanded the reach of these companies. Plenty of them are trying to get a toehold in the management of these schemes and this is where the business case for these insurance companies lie. In the same period, banks in India have almost shut down their credit window for the corporate sector and have crowded into the retail sector. HDFC Bank took the lead and now even SBI counts its retail portfolio as its biggest draw.
It is not that the insurance sector does not have a problem. Pointing to the potential of the insurance companies, Niyogi says their problems are mostly on their liability side, unlike the bad loans banks carry on their asset books. The state-owned non-life insurance companies will need a generous dose of recapitalise support. Yet it has been minuscule in comparison with the banks. They were offered Rs 12,450 crore in July this year.
Among those already listed, India’s sole reinsurer, GIC and the largest state owned non life company, New India Assurance are already almost as the two biggest state owned banks after SBI—the merged Punjab National Bank and Bank of Baroda. In any case the growth within the insurance sector shall be driven by the private sector companies, notwithstanding LIC. From FY19, a spate of consolidation is regularly changing signboards in the insurance sector. Once the sector emerges from this round of blood-letting, expect them to come within striking distance of the market caps of banks and also overtake them.
Table: The country's top insurers and banks by market cap
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Company |
ICICI Prudential
IDBI Bank
*as on 27 October, 2020; Source: BSE
