The rising bad loan level in the banking system did not deter Life Insurance Corporation of India (LIC), the country’s largest life insurer, from betting big on bank stocks in 2015-16.

The state-owned insurer raised its shareholding in many banks, including Allahabad Bank, Axis Bank, Bank of Baroda, Canara Bank, IDBI Bank, ICICI Bank, Indian Overseas Bank, Oriental Bank of Commerce, and Punjab National Bank during the last financial year.

It appears to have been quite undeterred by the stressed assets (Gross Non-Performing Assets + Restructured Standard Assets + Written Off Accounts) for the banking system as a whole, which stood at 9.8 per cent as at end-March 2012, rising sharply to 14.5 per cent by end-December 2015. During the same period, the stressed assets of public sector banks spiked from 11 per cent to 17.7 per cent.

Turnaround hopes

In raising its stake, LIC may be pinning its hopes on a turnaround in the fortunes of banks after the clean-up of their balance sheets and a likely revival in the economy.

The life insurer’s yen for bank stocks can be underscored with a couple of examples. LIC’s stake in Bank of Baroda, a public sector bank, increased from 9.95 per cent at March-end 2015 to 11.89 per cent at March-end 2016. During the same period, its stake in ICICI Bank, India’s second-largest lender, went up from 8.11 per cent to 13.75 per cent.

While in the case of public sector banks, LIC’s stake has mainly gone up due to its investment in their preferential issues, in the case of private sector banks their relatively better financial performance vis-à-vis public sector banks may have prompted it to pick up their shares from the secondary market.

Some have seen this as benefiting both LIC and the public sector banks. As Prakash Diwan, Head of Equities, Altamount Capital Advisors, says: “It is a win-win situation for banks, especially the PSBs, and LIC. While banks receive capital infusion to fund Basel III liquidity norms and capital for growth, LIC gets to pick up stakes at attractive valuations.”

Substantial holdings

After the government, LIC is the biggest shareholder in public sector banks.

Among government-owned banks, the insurer has the maximum shareholding (21.22 per cent) in Corporation Bank. Among private sector banks, it has the maximum shareholding (15.15 per cent) in Axis Bank.

In the case of IDBI Bank, in which the government is considering the option of reducing its stake below 50 per cent, LIC has more than doubled its stake from 7 per cent to 14.37 per cent.

During the financial year, the insurer built up its stake in banks even as the benchmark S&P BSE Sensex, comprising 30 scrips, and the S&P Bankex, comprising 10 bank scrips, declined 10.32 per cent (from 28,260.14 to 25,341.86) and 13.89 per cent (from 21,360.45 to 18,391.96), respectively.

Dipping profits

The lack of market enthusiasm for bank stocks stemmed from a sharp drop in their profits — a trend that started in 2011-12 and worsened in 2013-14.

The decline in profits was primarily the result of higher provisioning for delinquent loans during 2012-14. This, in turn, impacted their return on assets and return on equity. The banks’ spread and net interest margin also witnessed a decline during the period.

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