Fairfax Financial’s acquisition of a controlling stake in IDBI Bank could strengthen the lender’s growth prospects through improved governance, greater management autonomy and better use of its existing lending capabilities, according to Abizer Diwanji of Neostrat Advisors and Dinesh Kumar Khara, former chairman of State Bank of India (SBI).
The Cabinet Committee on Economic Affairs (CCEA) on Wednesday, October 14, approved the strategic restructuring of IDBI Bank in a deal valued at over ₹52,878 crore. Fairfax has been selected as the qualified bidder and will acquire shares at ₹81 apiece, followed by an open offer for the bank’s shares.
The Government of India will retain a 15% stake, while Life Insurance Corporation of India (LIC) will hold 19%, taking their combined shareholding to 34%.
Speaking to CNBC-TV18, Diwanji said the transaction marked a positive step after years of uncertainty over IDBI Bank’s ownership and management. He said the bank had used the intervening period to recover non-performing loans (NPLs), improve its balance sheet and attract more deposits.
“Now it’s time for new capital and new management practices to flow in to grow the business further,” Diwanji said.
Khara also expects Fairfax’s involvement to improve governance and give the bank greater certainty over its future. He said the end of uncertainty surrounding the privatisation process could support a positive market reaction.
IDBI Bank could tap SME and mid-corporate lending opportunities
Khara identified small and medium enterprises (SMEs) and mid-sized corporates as potential growth areas for IDBI Bank. These segments, he said, offer decent margins compared with retail and large corporate lending.
The bank already has the skills and network to gather deposits, which could be put to better use under the new management structure. Khara added that digital initiatives could further support the bank’s operations and growth.
Diwanji said IDBI Bank had become more resilient during the period when its proposed sale remained unresolved. The bank had recovered a substantial part of its existing NPL book and strengthened its deposit base, while also receiving capital infusion from the government.
He also sees scope to make better use of IDBI Bank’s relationship with LIC through bancassurance, given Fairfax’s presence in the insurance business.
Why experts believe the ₹81 share price is justified
Fairfax’s offer of ₹81 per share is below IDBI Bank’s closing market price of nearly ₹90, a difference of about 10%. However, Diwanji argued that the market price was not a reliable benchmark for assessing the transaction because only around 5% of the bank’s shares are available as free float.
He said the valuation should instead be assessed against the government’s pricing methodology and comparable transactions.
Diwanji cited RBL Bank’s valuation of 1.06 times book value as a reference point. He estimated that IDBI Bank was valued at around 1.5 to 1.6 times book value, arguing that the transaction price was favourable to the seller relative to comparable deals.
“The free float is so small that it did not have a significant impact,” Diwanji said, referring to the market price.
The government had earlier set a reserve price of ₹94.42 per share, but bids came in below that level. For the fresh financial bids, the benchmark price was set at ₹75.99 per share, and Fairfax’s offer of ₹81 was accepted.
Diwanji said the government’s decision to look beyond the prevailing market price was appropriate, given the limited free float and the need to assess the deal against comparable valuations.
CSB Bank merger will require a regulatory roadmap
Fairfax’s existing stake of around 40% in CSB Bank raises questions about how it will consolidate its banking interests following the IDBI Bank transaction.
Under the approved roadmap, CSB Bank is to be merged with IDBI Bank within two years, subject to applicable regulatory requirements.
Diwanji said a merger between the two banks was the more likely outcome and would need to follow a regulatory glide path. He also said Fairfax’s investment in IIFL did not necessarily mean it would have to divest that holding, given the group’s presence across several financial-services businesses.
Khara said Fairfax would need to submit an action plan explaining how it intended to address the ownership structure. The Reserve Bank of India (RBI) could require a comprehensive glide path, particularly if Fairfax’s other financial-services interests were taken into account.
“They will have to adhere firmly to that action plan,” Khara said.
Government and LIC stakes need not restrict management control
The government and LIC’s combined 34% shareholding need not prevent Fairfax from managing IDBI Bank as a private-sector institution, Diwanji said. He argued that ownership and operational control were separate matters, provided the government was willing to transfer control.
Khara similarly expects the government and LIC to retain their stakes without interfering in the bank’s day-to-day operations. In his view, they could be represented on the board while Fairfax exercises the majority influence.
Khara expects the transaction to receive a positive response from the market, citing the prospect of better governance and the removal of uncertainty over IDBI Bank’s ownership.
The key test will be whether the new management structure can translate the bank’s improved balance sheet, deposit network and lending capabilities into sustained business growth.
Watch accompanying video for full conversation.
Why experts believe Fairfax’s IDBI Bank deal could reshape the lender’s future