Why the stock of YES Bank has fallen over the past week

BL Research Bureau

After YES Bank announced the opening of its qualified institutional placement (QIP) issue last week (August 8), the stock which has been under immense pressure over the past year, started to fall once again. While the fund raising will help the bank enhance its capital adequacy ratio, which has been weak, the market did not seem too pleased.

The management also announced some management reshuffle last week, which kept the stock under pressure. Today the stock is down nearly 8 per cent in trade.

What is really troubling investors?

More dilution?

A sharp rise in slippages and provisioning has eroded the bank’s earnings over the past year, leading to a big strain on its capital. As of June quarter, the bank’s Tier I capital adequacy ratio stood at 10.7 per cent (regulatory requirement of 8.875 per cent). The bank has however stretched itself thin on CET 1 capital (Common Equity Tier-1) that stood at 8 per cent as of June quarter---barely above the regulatory requirement of 7.375 per cent.

Hence raising capital has been critical for the bank to meet the capital norms.

The capital raising committee of the bank’s board, last week approved the floor price for the issue at 87.9 per share (current price Rs 75) and the committee stated that it may offer a discount of not more than 5 per cent on the floor price. The committee will meet on August 14 to consider and approve the issue price and final discount. According to reports, the lender has raised close to Rs 2,000 crore through the QIP.

While the capital raising has addressed the immediate concern of the bank, it has not pleased the market much.

One, the bank had originally, in its April 26 board meeting intended to raise as much as $1 billion. The steep fall in the bank’s market capitalisation since then has restricted the bank’s ability to raise the intended funds (it has instead raised about $275 million or Rs 2000 crore according to reports). Since May, YES Bank’s market capitalisation has fallen by about Rs 21,000 crore. Raising a huge capital would have led to a steep dilution in equity. The recent QIP itself implies an equity dilution of about 9 per cent.

Two, the recent fund raising will only meet the bank’s requirement for some time. From 8 per cent YES Bank’s CET 1 ratio will inch up to about 8.6 per cent. Hence the bank will have to raise further capital soon, leading to another round of equity dilution. This may continue to keep investors wary.

Rise in bad loans

What is more of a concern is the fact that the bank’s low provision coverage, can continue to add pressure to earnings if slippages continue to rise. Provision coverage ratio has been significantly slipping over the past three fiscals (60-70 per cent in FY15 and FY16) to about 43 per cent in the latest June quarter. Hence the need to raise capital can persist through the fiscal.

As such, slippages for YES Bank have been steadily moving up over the past year. In the latest June quarter, gross slippages shot up to ₹6,232 crore—up from ₹3,481 crore in the March quarter. What is also worrisome is the increase in the bank’s stressed accounts. YES Bank had identified ₹10,000 crore of stressed accounts in the March quarter; this has gone up to ₹29,470 crore in the June quarter. This could lead to an increase in provisioning in the coming quarters, adding pressure on earnings and capital.

Loan growth to be muted

Capital is critical to funding the bank’s credit growth, which has taken a big knock in recent quarters. YES Bank reported stellar growth in loans in the past---30-50 per cent robust growth in the past two to three fiscals. In the latest June quarter, loan growth has fallen substantially to 10 per cent (down from 18.7 per cent in the March quarter).

The bank will have to walk the tight rope in the coming months--balancing its fund raising needs without huge dilution for existing investors, which will be challenging.

COMMENT NOW