Money & Banking

YES Bank rescue plan : Will SBI and consortium of private lenders be able to bail out the bank?

Radhika Merwin BL Research Bureau | Updated on March 15, 2020 Published on March 14, 2020

SBI investing over ₹6,000 crore and other investors coming forward is only the first step in an extended revival process

About a week ago, when the RBI came out with the draft reconstruction plan on YES Bank, SBI appeared to be the sole investor ready to bail out the capital-starved YES Bank and its depositors, with an initial commitment of infusing ₹2,450 crore into the bank. A week later the Cabinet has now approved the reconstruction plan, setting a higher authorised capital of ₹6,200 crore (from RBI’s proposed ₹5,000 crore), with a consortium of private lenders committing to invest in YES Bank.

The rescue plan, though more concrete than the earlier dished-out draft scheme by the RBI, is a weak alternative to the ‘forced merger’ route typically adopted by the RBI in similar situations. While the merger of a bank the size of YES Bank would have been challenging even for the country’s largest lender — SBI —,the stop-gap capital infusion plan into YES Bank is riddled with challenges.

One, the medley of banks will bring in about ₹10,000 crore into the bank (based on the latest stock exchange filing by YES Bank). The December quarter results reveal a sharp rise in bad loans and provisioning that has resulted in the bank’s CET1 ratio plummeting to 0.6 per cent (from 8.7 per cent in September quarter), as against the RBI requirement of 7.375 per cent.

Taking the capital infusion of ₹10,000 crore into account and writing down ₹8,415 crore of AT-1 bonds (the Cabinet’s approved scheme had no mention of it), YES Bank’s CET1 ratio would scale up to 7.6 per cent, which is just barely above the regulatory requirement. Hence, the worry is whether the bare-bones capital will be enough to absorb future losses and fund the bank’s growth?

Two, it is still highly probable that once the moratorium is lifted (March 18), many depositors in YES Bank will withdraw their funds.

Based on the December quarter results, it has become evident that depositors have withdrawn ₹71,000 crore of deposits since September.

The massive exodus has already put a strain on YES Bank’s liquidity position. The bank’s liquidity coverage ratio (LCR) has plunged to 20.9 per cent (as of March 5), a far cry from the 100 per cent regulatory requirement. The main objective of the LCR is to ensure that banks maintain sufficient liquid assets to meet obligations in a 30-day stress scenario — stocks of liquid assets should be equal to 100 per cent of the total net cash outflows over 30 days.

If the government hopes to prevent the exodus of deposits by lining up marquee names in the banking sector as YES Bank’s benefactors, it could backfire, with shareholders in these banks (SBI and other private lenders) feeling short-changed.

Three, with existing shareholders seeing a huge 44 per cent erosion in book value per share (based on December quarter results), taking into account the ₹10,000 crore of capital infusion, the next leg of capital infusion can erode value further for minority shareholders.

Four, writing down YES Bank’s loan book to its true value will be critical. In the December quarter, the bank saw a spike in bad loans to ₹40,709 crore, from ₹17,134 crore in the September quarter. If there are further write-offs (huge at that), it could also throw a spanner in the works on the reconstruction plan.

Above all, while the plan states that the new board will have at least two directors of SBI, the participation of the other private banks in running the affairs of the reconstructed bank is unclear.

After all, YES Bank has been predominantly a corporate lender (60 per cent of its overall book) with concentrated exposures. Aside from SBI that has a significant corporate and retail book, the other private lenders are predominantly retail focussed (ICICI and Axis Bank have reduced their corporate exposures in recent years).

What will be the long-term strategy for YES Bank under the aegis of the consortium of lenders?

Reconstruction plan

As per the reconstruction plan approved by the Cabinet, the authorised share capital of the reconstructed bank will be altered to ₹6,200 crore (including ₹200 crore of existing preference share capital). This is notably higher than the ₹5,000 crore of authorised capital the RBI had laid down in its draft scheme.

This implies that there is expectation of a higher capital requirement to bail out YES Bank than was envisaged earlier.

SBI earlier had approved investment of ₹7,250 crore into YES Bank (725 crore shares at ₹10 each). Other lenders had also intimated the stock exchange on their commitment to invest in the bank.

According to the final plan put out by YES Bank on the exchanges, the total investment by SBI (₹6,050 crore) and ₹3,950 crore by other lenders — ICICI Bank (₹1000 crore), Axis Bank (₹600 crore), Bandhan Bank (₹300 crore), Federal Bank (₹300 crore), Kotak Mahindra Bank (₹500 crore), IDFC Bank (₹250 crore) and HDFC Ltd (₹1,000 crore) would result in a capital infusion of ₹10,000 crore into the bank.

While the Cabinet-approved scheme had no mention of AT-1 bonds, the December quarter results take into account a write-down of ₹8,415 crore of AT-1 bonds to compute the capital ratios.

Rocky road ahead

SBI upping the ante and investing about ₹6,000 crore and other investors coming forward to bail out the bank, is only the first step in the long-drawn revival of YES Bank.

Taking into account the stress recognised in the December quarter and the initial ₹10,000-crore capital infusion, the bank’s CET-1 ratio has climbed up to 7.6 per cent, which is just above the regulatory requirement. If there is a steep mark-down on stressed assets subsequently, the core capital could erode further.

This implies that continued capital support will be required from SBI and other investors at least for the next two years.

There is also the risk of exodus of deposits from YES Bank once the moratorium is lifted on March 18. Currently, the bank has deposits worth ₹1,37,506 crore. Hence, a sustainable revival of YES Bank now hinges on the ability to draw in continued capital, contain deposit outflows, quick assessment of the actual value of the loan book, and importantly the ability of the new management (an unusual mix at that) to ensure a sustainable business model, better governance and supervision.

Given that the weak economic environment could lead to a sharp fall in credit growth and higher pace of delinquencies, the survival of YES Bank will be a long-drawn crusade.

What it means for investors

Existing investors in YES Bank have had a torrid time over the past few years, with the stock decimating in value. The uncanny lock-in imposed by the reconstruction plan has only made matters worse for retail investors. It mandates a three-year lock-in for existing shareholders (up to 75 per cent of their holding) who hold shares of 100 and above in the bank. Hence, such investors have little option but to hold on to the stock and see how the proposed plan pans out.

New investors should refrain from taking any exposure to the stock at this time. While the strong gains posted by the stock over the past week may appear tempting, it would be unwise to bottom-fish and try to bet on the revival at this juncture. At every step of additional capital infusion, which appears imminent, there could be more dilution for existing shareholders.

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Published on March 14, 2020
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