IDBI Bank valuation & interesting insights

Metro India News | Hyderabad 

Before Fairfax offer of Rs. 81 per share for IDBI was announced, its closing price was Rs. 90.44 due to which the backdrop, valuation methods and outcome are worth deliberating. Valuation of a financial institution and particularly a bank is complex. Traditional methods including Discounted Cash Flow (DCF) and EV/EBITDA (Enterprise Value to Earnings Before Interest, Tax, Depreciation & Amortization) are not suitable since both raw material and output is funds. Also, both mobilizing raw material and delivering output are subject to stringent regulatory norms. 

Globally banks are valued using direct market multiples if stock is widely held, liquid, and has comparables. In the absence of these, banks are valued using a combination of market multiples and income approaches. In market multiple approach, relative valuation is used adopting a suitable multiple of comparables. In income approach, dividend discount model (DDM) or Residual Income Method are used. In Residual Income Method, bank’s value is determined by adding exiting book value of equity and present value of residual income.

Residual income is net income less equity charge. Equity charge is cost of capital which is the shareholders expected return on equity. India experienced valuation of a bank after a long time, thanks to IDBI deal. IDBI has a total asset profile of Rs. 4.67 trillion. It comprised of net advances & loans of Rs. 2.59 trillion, investments Rs. 1.28 trillion, balances with RBI Rs. 0.33 trillion, balances with banks & money Rs. 0.24 trillion, fixed assets Rs. 0.10 trillion, and other assets Rs. 0.18 trillion.

However, only 5.3% of its stock is in the market and even that traded thinly. It’s market price per share (MPS) had high volatility between Rs. 60 and Rs. 120 within 6 months in 2026, which was the valuation period.  Fair market value and fair asset value are obtained using two methodologies and the values are averaged to determine the benchmark price. The first round of the divestment process saw 5 bids of which 4 were found fit and proper and only 3 proceeded to next step and finally sealed bids were received only from Fairfax and Emirates NBD.

The evaluation included mapping valuations of components and total against Rs. 76 benchmark price. Rs. 81 bid by Fairfax was accepted concluding the largest ever Foreign Direct Investment in Indian financial sector. Since it is a strategic sale, the evaluation also considered bidder’s plans to add fintech, modern technology, team retention, paygrade protection, expansion plans and aspiration to emerge as a global bank. The valuation and evaluation appear to be earnest. Still, to put the debates to a logical rest, the valuation reports should be publicly disclosed as the employee unions and media have been demanding.  

-Dr. Kishore Nuthalapati (The author is an economist and a corporate finance professional. He is serving as the CFO of BEKEM Infra Projects Pvt Ltd, Hyderabad.)