YES Bank Q4: Deposit outflows, breach of capital ratios raise concerns on future of the bank

For investors in the crisis-hit YES Bank that was bailed out by a clutch of banks about two months ago, the bank’s March quarter results has understandably been on the top of their radar. Given that the previous December quarter results (declared after much delay) threw up some nasty surprises on bad loans and worrisome trends on liquidity and capital position, whether the bank continued to see deposit outflows after the restrictions were lifted on March 18, and if the medley of banks bringing in Rs 10,000 crore of capital was adequate to revive the bank---have been questions lingering in the minds of depositors and investors.

The bank’s March quarter results, sadly, do not allay any of these fears.

The steady withdrawal of deposits even after the restrictions were lifted (Rs 32,000 crore between March 18 and March 31), capital and liquidity ratios slipping below the regulatory requirement and the evolving risks owing to Covid-led disruption, throw up grave concerns on the bank’s ability to continue as a going concern.

The independent auditor’s review report (B S R & Co. LLP) points out that “assumption of going concern is dependent on the bank's ability to achieve improvements in liquidity, asset quality and solvency ratios and mitigate the impact of Covid-19 and thus a material uncertainty exists that may cast a significant doubt on the bank's ability to continue as a going concern.”

As of March 31, the bank’s CET 1 ratio and Tier 1 capital ratio slipped to 6.3 per cent (regulatory requirement of 7.375 per cent) and 6.5 per cent (regulatory 8.875 per cent), despite Rs 10,000 crore capital infusion by various lenders and the writing down of AT 1 bonds amounting to Rs 8,415 crore. While bank’s results suggest that the breach in capital ratios has been on account of its decision to increase its provision cover (only marginally to 73.8 per cent from 72.7 per cent in December quarter), the quantum of provisions made in light of the increasing risk on account of the pandemic, appear inadequate.

The bank has made provisions of Rs 238 crore (against moratorium NPA standstill accounts of Rs 2,713 crore). But a sizeable portion of loans falling under the moratorium (35-45 per cent across MSME, corporate, and retail) and sharp downgrades likely in the corporate book (SMA 1 currently at Rs 10,781 crore) going ahead, suggest that the bank’s provisions could go up sharply in the coming quarter.

The bank’s bare bones capital would not be enough to absorb future losses. The RBI placing the bank under 'Prompt Corrective Action' (PCA) on breach of CET ratio could make matters worse and throw up more challenges in the already long drawn revival plan of the bank.

Hence the critical question is whether, SBI (alone having infused Rs 6050 crore) and the other seven lenders, that came to the rescue of YES Bank, would be able to pump in more capital given their own capital constraints. Remember the Covid-led lockdown has thrown the entire banking system out of gear. YES Bank’s quick fix rescue plan that hinges on the continual support of its benefactors can run aground if the pandemic situation worsens.

Where though capital?

Yes Bank’s asset quality woes began in the March 2017 quarter when it first declared divergence in bad loans pertaining to the previous FY16 fiscal. Since then even as the bank continued to deliver robust loan growth, concerns over governance and asset quality started to weigh on the stock. The bank’s FY19 fourth quarter results (declared a year ago), unmistakably pointed to the fast deteriorating asset quality and financials of the bank. (We gave a ‘sell’ call post Q4FY19 results last year.

In the December 2019 quarter, bad loans had spiked to Rs 40,709 crore from Rs 17,134 crore in the September quarter. The provisions for bad loans jumped ten-fold to Rs 22,328 crore in the December quarter. The bank had reported loss of Rs 18,560 crore. The bank’s CET 1 ratio has plummeted to 0.6 per cent (from 8.7 per cent in September quarter).

In the March quarter, the bank’s bad loans moderated to Rs 32,878 crore, mainly been due to moratorium granted on various loans as per the RBI’s directive.

The directive stated that banks can retain their asset classification on accounts where moratorium has been granted.

According to the bank, borrowers (with overdue exposures as on Feb 29) had a total outstanding loan of Rs 14,956 Crores as on March 31. About 35-45 per cent of customers (in value) have availed the moratorium which is higher than most other peers (Axis Bank 25-28 per cent). YES Bank has made Rs 238 crore provisions (in accordance with the RBI mandated 10 per cent provision) on overdue loans where moratorium is granted.

However given the visibly huge financial impact of Covid on corporates across sectors, this provisioning appear significantly inadequate (Axis Bank made Rs 3,000 crore Covid related provisions in the March quarter). After all there is already the risk of steep mark-down in the YES Bank’s stressed book, given its concentrated exposures.

Importantly this now casts a doubt over the capital position of the bank, which has already breached regulatory requirements.

The ongoing investigation by the Enforcement Directorate into some aspects of transactions of the founder and former MD & CEO Rana Kapoor and alleged links with certain borrower groups, could have further impact on the financials of the bank.

Liquidity woes

YES Bank had breached critical liquidity and statutory requirements in the December quarter. In the December quarter, liquidity coverage ratio (LCR) had slipped to 74.6 per cent owing to substantial deposit outflows of about Rs 44,000 crore. Withdrawal of deposits post December amounting to Rs 28,000 crore (until March 5 when moratorium on deposits was placed) had led to LCR falling to 20.9 per cent (against regulatory requirement of 100 per cent).

According to the March quarter results, deposit outflows continued after the moratorium was lifted on March 18--- Rs 32,000 crore of outflows between March 18 and March 31. Another Rs 2600 crore of deposits have been withdrawn subsequently until May 2.

This suggests that the rescue plan (bringing in marquee names) did not appear to instil much confidence in depositors. The March-quarter results that highlight more uncertainty over future capital infusion, can once again trigger deposit withdrawals putting the bank in a tight spot. LCR as of May 2 is 34.8 per cent (regulatory requirement now at 80 per cent). The bank had been granted a short term special liquidity facility for 90 days which ends on June 16. Whether the RBI extends this window needs to be seen. The bank also continues to breach its statutory liquidity ratio (SLR) requirement which impairs its ability to raise money quickly.