Riding high on the bullish sentiment in the economy, banks are rushing to put either sell their non-core assets or dilute their stake to partially make up for their shrinking margins amid high cost of funds and free up growth capital.
Despite banking regulator giving two years time to HDFC Bank for holding stake in its wholly-owned subsidiary HDFC Education and Development Services (providing services to three education schools), the bank is planning to sell its entire stake via Swiss challenge process to derive the maximum price for the asset.
Canara Bank decided to sell 13 per cent equity shares in its joint venture subsidiary Canara Robeco Asset Management Company by listing the business on the stock exchange. The public sector bank has 51 per cent stake in the mutual fund.
Similarly, the country’s largest bank State Bank of India also approved sale of 6 per cent stake in its subsidiary SBI Mutual Fund, but had to call off after market turned volatile due to Russia’s invasion on Ukraine.
Amit Goel, Chief Global Strategist, Pace 360 said RBI has directed banks to maintain a certain amount of capital relative to the risk-weighted assets and thus by divesting non-core assets, banks can free up capital that can be redirected towards their core banking activities.
This strategic move not only enhances their financial health but also enables them to invest in areas that could potentially improve their Net Interest Margin, he said.
Shrey Jain, Founder and CEO SAS Online - India’s Deep Discount Broker, said rise in policy rates and falling liquidity in the system have inflated the cost of funds for the banks and has put pressure on their’ margins.
Listing subsidiaries that are doing well on the stock exchanges augurs well for banks’ shareholders as analysts will start factoring in the underlying value, he added.
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Vijay Singh Gour, Senior Analyst, Choice Broking said last June, HDFC sold HDFC Cedilla as RBI asked them to merge the entity before merging HDFC with HDFC Bank or bring down holding to 10 per cent in two years.
Merging assets worth ₹15,000 core of HDFC Credila with assets of ₹25 lakh crore would have taken one year after receiving multiple approvals and the management decided to sell the asset, he added.
Shreyansh V Shah, Research Analyst, StoxBox, observed that with the equity market and mutual funds doing well it has become difficult for banks to garner cheap deposits.
Banks believe that the current bull market will help them enhance the valuation of their stakes in these subsidiaries which will help them reap the benefit of premium valuations, he said.
“Banks are likely to face the brunt of increased cost of funds on account of intense competition to grow deposits from small finance banks,” said Shah.