Central Bank of India & IOB privatisation: Should investors change tack?

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With the Centre in a hurry in a Covid-ravaged season to raise resources, state-run Central Bank of India and Indian Overseas Bank (IOB) might be up for sale, according to a report in The Times of India. It is believed that NITI Aayog  recommended the names of these two banks for disinvestment to the Centre last week, though their names were not disclosed.

Central Bank was set up in 1911 and is based in Mumbai. Indian Overseas Bank was founded in 1937. Both were among the list of 14 banks taken over in July 1969 by the Indira Gandhi government.

Shares of Central Bank of India traded 11% higher at Rs 23.65 in the afternoon trade on Monday, while Indian Overseas Bank was up 5.71% to Rs 20.32.

IOB reported a Rs 213 crore profit for the quarter ending December 2020 compared to Rs 6,075 crore loss a year ago.

In FY20, the bottomline of Central Bank of India was in the red with a net loss of Rs 1,121.35 crore loss.

Will it result in windfall?

There is no word yet on how much does the government want to raise from a stake sale of these two banks.

For the Centre, privatisation-disinvestment remained a chimera in the last financial year. So far, the new year too holds no big promise.

In FY21, the government had set a target of Rs 2.10 lakh crore from privatisation proceeds but ended up revising the target to Rs 0.32 lakh crore. Eventually it netted Rs 0.328 lakh crore through sale of shares in central public sector enterprises.

In other words, 15.6% of the original target of Rs 2.10 lakh crore was achieved.

Scarred by the experience in Covid-hit FY21, the Centre has kept a reduced target of mopping up Rs 1.75 lakh crore from privatisation in FY22.

Privatisation drive

On the block are the mega sale of a stake of LIC, BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam, two public sector banks and one general insurance company. It is popularly held that 10% stake of LIC can easily net Rs 1 lakh crore or above for the government.

But LIC officials say that it is unlikely that the LIC offer would materialise this year. It will be quite a time-consuming process to recast the accounts of the insurer in a manner that is appropriate to the investors and value all the assets — a lot of them real estate – before the stake sale.

The second savage run of Covid and apprehension of a possible third wave, not to mention the growing political opposition, could ruin Nirmala Sitharaman’s projections this year too.

What’s in it for investors?

Overall, the majority of PSU stocks have delivered a positive return to investors on a year-to-date basis. With a rally of 160%, Hindustan Copper emerged as the top gainer in the list. It was followed by MMTC (up 123%), Bank of Maharashtra (up 122%) and BHEL (up 106%). Indian Overseas Bank and Central Bank of India have also gained 80% and 54%, respectively, in 2021 so far.

Commenting on the robust performance of the PSU pack, Sanjiv Bhasin, director, IIFL Securities, told Money9 that improvement in the balance sheet and beginning of the new capex cycle have supported public sector companies.

He believes that falling non-performing assets, rising net interest margin (NIM) and sharp expansion in credit book over the next 2-3 years will support lenders.

“Overall, we expect the outperformance will continue in the PSU pack. PSUs have re-rated because of divestment plans,” Bhasin added.