Will Modi govt downsize its stake in SBI?

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As we all know that the Finance Ministry led by Nirmala Seetharaman is resorting to disinvestments in the public sector banks as she had indicated to this effect in her budget this year wherein she mentioned subtly that Disinvestment in Public sector to the extent of Rs.2.10 lakh crore may prove to be her government’s primary funding source.

But it was nobody’s guess that she would also resort to disinvestment in profit-churning banking giants such as Bank of Maharashtra and State Bank of India. As for LIC, it has already been listed for Disinvestment which we have already been published in this column besides Bank of Maharashtra as well.

Though not declared in Budget, Bank of Maharashtra shares may be disinvested first by October month to bring down Govt share from 92.49 per cent to say 30 per cent. This will bring down Govt’s representation in the Board of Directors from a total of 10 directors to 3 directors. But the government may get funding of around Rs.7500 crore taking the total number of funding to a maximum of Rs One Lakh Crore including Rs 70,000 Crore from LIC and Rs 25,000 Crore from UCO Bank and Punjab & Sind Bank which were also on the hit list.

But Sitharaman still has to mobilise yet another Rs 1.10 Lakh Crore to meet the Modi’s target of accruing Rs. 2.10 Lakh Crore disinvestment by March 2021. The question now before her is how to reach the target of the remaining 50 per cent as the expenditure continued to be on the rise while revenues can be put at 30 per cent hardly.

So Sitharaman said to have chosen the safe method by targetting the SBi. She understood to have decided to reduce government’s stake by downsizing its stake in SBI from its 56.92% to 46.92% that means 10% of market shares may be disinvested by public offer or another chance is to allocate to institutions with a good premium.

During last one-month SBI share increased from Rs.151 to Rs.193 as profits posted for 2019-20 and Q1 of FY2021. So the bank posts profits again in Q2: ending September 30, 2020, then share will rise to Rs.250 or 260. Last year August it was Rs.351. So by mid-November 2020 say at @260 per share the disinvestment move may result in netting profits of around Rs.25,000 crore to the Govt.

Why SBI now?

Total shares in SBI are 892.46 crore, of which Govt owns 507.97 crore shares at 56.92 per cent. Market cap is Rs.170,861 crore including the value of all shares.

Q1 FY 2021 results

SBI Life Insurance company and SBI Cards & payment company both are doing well-posting profits for Q1 of FY2021 at Rs.390.89 crore and Rs.393.10 crore. The share of SBI is 55.50 per cent in SBI Life and 69.53 per cent in SBI Cards. The share is going well at Rs.885 for SBI Life and Rs.773 for SBI Cards.

SBI Life has the advantage of SBI Bank staff canvassing SBI Life Policies to customers. Around 15 per cent of the incentives of marketing in SBI Life goes to SBI staff only. The consolidated profit of SBI+ SBILife + SBI cards was put at Rs.4776.50 crore for Q1 of FY 2021.

Stand-alone profit of SBI only for Q1 of FY2021 was Rs.4189.34 crore. SBI sold 1.5% stake in SBI life for Rs.1400 crore in this first quarter. Even otherwise SBI has a good profit for Q1 of FY 2021.

As discussed in my earlier articles if a bank posts 50 per cent of other income as net profit it is a good bank. For Q1 of FY 2021 other income was Rs.7957.48 crore with 26.67 per cent growth YOY basis.

Cost of funds including interest on deposits was lowest at just 4.47 per cent only, which was was the main reason for good profits. Income tax paid for Q1 2021 was Rs.1370.34 crore. Deposits as on June 30, 2020, were Rs.34.20 lakh crore with 5 per cent growth over March 31, 2020, very good display indeed and advances were Rs.23.90 lakh crore with a slight fall of 1.5 per cent over March 31, 2020.

Another good reason for profits was the reduction in provisions to Rs.9620.40 crore compared to the previous quarter of Rs.12,076.89 crore. Interestingly, the HDFC Mutual fund invested Rs.4897 crore in SBI shares besides foreigners have a share of 7.81 per cent and shares quoted in the London market were 1.25 per cent (GDR).

It indicates that public, Mutual Funds (13.01%) Foreigners are much interested in SBI share. So the government may first reduce the share of SBI in SBI Life from 55.50 per cent to 45% in this year and also gradually reduce in SBI cards. 27 per cent of profits by the sale will be paid as Income tax.

So taking the above factors into consideration, the government stake in SBI will be reduced to 45 per cent by November-December this year. So Disinvestment certainly will happen soon.