Himadri Buch & Beena Parmar
IDBI Bank has begun the search for a buyer for its mutual fund business, sources familiar with the development told Moneycontrol.
In February, the bank’s board had decided to dilute stake in some non-core businesses to shore up capital base.
As on March-end the average assets under management of IDBI Mutual Fund stood at Rs 7,718 crore as against from Rs 7,761 crore end of December.
As part of this disinvestment exercise, IDBI Bank may also look at divesting its stake in other non-core ventures like IDBI Federal Life Insurance IDBI Capital Market Services, IDBI Intech, National Stock Exchange, National Securities Depository, and NSDL E-Governance infrastructure.
Meanwhile, IDBI Asset Management Company has been witnessing an exodus of staff for the last one month with 15-20 people putting in their papers. The exodus has been largely from sales and research team, industry sources said.
The strength of the fixed income team too has come down from a 7 member team to a 4 member team.
An industry source in know of the development said, “IDBI (Bank) is trying to cut costs in its AMC business and boost assets under management so that it gets higher valuation for their mutual fund business.”
“The (IDBI) bank is still finding a right process to go about for selling their businesses. After the Kingfisher case, IDBI group is very cautious in taking all the decisions,” the source quoted above added.
Typically, mutual fund acquisitions are valued on the basis of the asset mix of a fund house, its network strength, long-term earning prospects and profitability of the mutual fund schemes sold.
Generally, higher the amount of equity assets, greater is the valuation.
The fund house has been consolidating their branch offices. According to an industry source the mutual fund has restructured all their regional offices in to zonal office.
When Moneycontrol contacted IDBI Bank, a senior official on condition of anonymity said, “We have been looking (for buyers) but there is nothing active as of now. In February, we got an in-principle approval to sell all non-core assets. These are more complex transactions than they seem, so it will take time.”
IDBI Bank’s losses in the fourth quarter doubled to Rs 3,199 crore, compared to Rs 1,735 crore in March quarter 2016.
For another straight quarter, gross NPAs increased substantially to 21.25 percent of total loans from 15.16 percent, while net NPAs nearly doubled to 13.2 percent from 6.8 percent.
The Reserve Bank of India (RBI) has already put IDBI Bank under a prompt corrective action (PCA) regime, due to its high level of net non-performing assets (NPAs) and negative return on assets.
This would mean taking mandatory corrective action, such as raising of capital levels, restricting dividends and branch expansion. In an extreme scenario, the bank might have to put restrictions on management compensation.
IDBI Bank’s common equity tier-I ratio as on March 2017 was at 5.64 percent (plus counter cyclical buffer), below the minimum regulatory requirement of 6.75 percent under the PCA framework.
Analysts are concerned whether the bank will be allowed to dip into its reserves to pay the coupon (interest) towards its Rs 2,000 crore of additional tier-I bonds.
The fund house is also struggling with cash strapped Ballarpur Industries commercial paper. The company is yet to pay Rs 26 crore maturity proceeds to the fund house.
Independent industry experts said that largely foreign players may be keen in buying out IDBI MF’s stake.
“Value of IDBI MF lies in its parentage. Mutual funds are valued based on their assets in mix of liquid, debt and equity and its ability to grow the business,” said Dhirendra Kumar, Chief Executive Officer of fund tracking firm Value Research, said.
“Largely foreign players will look to buy assets or top 5 fund houses may also show intereset and it could be a meaningful acquisition,” Kumar said adding that the bank may fetch valuation of 4-5 percent of AUM.
The total asset base of Indian mutual fund business crossed Rs 19 lakh crore in March 2017, although the industry is highly scattered with 42 active players with most of them having small businesses.
In last few years, fund industry has been facing challenging times due to regulatory changes which has led to several mutual fund players exiting the space.
Last year, JP Morgan sold its mutual fund business to Edelweiss Asset Management, while Goldman Sachs sold its MF business to Reliance MF and Morgan Stanley’s sold its MF operations to HDFC MF.
Besides, ING MF was acquired by Birla Sunlife and Kotak MF bought assets of PineBridge MF and DHFL Pramerica Asset Managers acquired Deutsche Bank’s Indian asset management business.
Industry experts believe that in the coming months there could be further consolidation as SEBI’s deadline for mandatory Rs 50 crore minimum net worth for asset management companies is approaching.
In February 2014, SEBI had given three years to asset management companies to meet the Rs.50 crore minimum net worth norm. The previous minimum requirement of net worth for asset management companies was Rs 10 crore.
This move was taken to weed out non-serious players and ensure stability of the financial system.