YES Bank: Why the second round of capital raising will be challenging

YES Bank’s capital ratios, that managed to move above the RBI’s regulatory requirement after SBI and seven other lenders pumped in ₹10,000 crore into the bank, have slipped again below the critical thresholds in the March quarter. As of March 31, the bank’s CET-I ratio and Tier 1 capital ratio slipped to 6.3 per cent (as against regulatory requirement of 7.375 per cent) and 6.5 per cent (8.875 per cent) respectively.

This implies that the bank will have to take immediate steps to shore up capital, to avoid the RBI placing it under prompt corrective action (PCA). Understandably, all eyes are on SBI to rally around, as it holds 48 per cent in YES Bank currently.

But given that SBI’s holding in the bank is already near the threshold limit of 49 per cent (as laid down in the Centre’s approved reconstruction scheme), other lenders and investors too will have to infuse capital, to ensure that SBI’s holding stays within the 49 per cent mark. The management has stated that it intends to diversify its investor base and rope in other investors through a combination of QIP (qualified institutional placement) and follow-on public offer (FPO), among other options. But this is easier said than done.

Remember the relentless attempts put up by the earlier management to raise capital?

While the fact that the bank now backed by SBI and other lenders (and of course the clear intention of the government to do whatever it takes to keep the bank afloat) could perceptibly help draw in investors, one must remember that the entire banking system is in doldrums amid the Covid-led disruption. Investors are unlikely to take these high-risk bets in a hurry.

But time is of the essence for YES Bank, which needs capital not only to meet regulatory requirements but also to absorb losses in the current volatile environment. The management has stated that it intends to raise ₹10,000-12,000 crore immediately by June. This second round of capital raising (after the reluctant contribution by SBI and others) will be a herculean task, but critical to ensure the survival of the bank.

How much capital?

Based on YES Bank’s Basel-III disclosures, its risk weighted assets stood at ₹2,40,571 crore as of March 2020, a tidy 21 per cent lower than in the same period last year. This implies that the bank has been pruning its risky assets to bolster capital ratios. Still, the sharp rise in bad loans and provisions in the December quarter resulted in the bank’s CET-1 ratio plummeting to 0.6 per cent. After SBI and seven other lenders brought in ₹10,000 crore, the CET-I ratio scaled up to 7.6 per cent, only barely above the regulatory requirement.

Hence the bank’s already weak CET-I ratio falling below the regulatory norm in the March quarter was only expected, given the concentrated corporate exposures of the bank and the increase in stress.

There is now an urgent need for the bank to raise capital to first meet the regulatory requirement. Based on the Basel-III figures, the bank immediately needs about ₹5,000 crore of Tier-1 capital to meet the regulatory norm. This aside, the bank will obviously need additional capital to absorb incremental losses on account of higher delinquencies and provisioning in the coming quarters.

While the bank’s bad loans declined by about ₹7,800 crore sequentially in the March quarter, it was led by ₹6,300 crore of technical write-offs rather than recovery. Also, the three-month moratorium helped limit slippages. But as is the expectation for banks across the board, slippages are likely to spike, particularly in the corporate portfolio post the moratorium on loans. Hence YES Bank, that has so far made about ₹238 crore of provisions for accounts under moratorium (35-45 per cent of loans in value) is most likely to see a sharp increase in provisioning. Hence the bank will require at least about ₹10,000-12,000 crore of capital immediately (including the bare minimum ₹5,000 crore).

How to raise the funds

After all the high drama, the regulator and the Centre managed to rope in a clutch of banks to rescue YES Bank under the reconstruction scheme.

SBI invested ₹6,050 crore, while seven other lenders invested ₹3,950 crore — ICICI Bank (₹1,000 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).

Currently, SBI holds 48 per cent in YES Bank, ICICI Bank and HDFC Ltd (8 per cent), Axis Bank (4.8 per cent), Kotak Bank (3.6 per cent), Bandhan Bank (2.4 per cent), Federal Bank (1.9 per cent) and IDFC Bank (1.7 per cent). As per the reconstruction scheme, SBI can hold up to a maximum of 49 per cent in YES Bank, and not reduce holding below 26 per cent for three years.

Much of the burden of raising fresh capital is likely to fall on SBI. But given that it already holds close to the threshold limit of 49 per cent, the bank will have to rope in other investors too, to conform to the investment cap under the reconstruction scheme.

While the regulator and the Centre managed to nudge private lenders to pitch in last time around, coaxing them to pump in more capital may be difficult amid the ongoing Covid-induced crisis. With huge provisions and slippages on the anvil, capital has become precious and scarce for most banks.

Raising money from other investors will be more challenging, given that the market as a whole has turned risk-averse to investing in banks. Listed private banks have lost nearly ₹5 lakh crore in market capitalisation since March this year, reflective of the weak investor sentiment.

At what price?

Even if the management manages to bring in investors, at what price will they issue shares to them in the bank? As per the reconstruction scheme, SBI and others were issued shares at ₹10 per share (₹2 face value plus premium of ₹8). YES Bank’s current market price is ₹27.

If new investors are issued shares at a steep discount to the market price, it could lead to steeper dilution for existing shareholders (depending on the quantum of capital they infuse) in the bank. If the capital raising is done at near-around market price levels, then the more critical question will be, whether new investors will be willing to pay high valuation for the crisis-hit bank. YES Bank currently trades at price to book of about 1.6 times (FY20). Private lenders such as Axis Bank (1.3 times), IndusInd (0.9 times) and RBL Bank (0.6 times), trade at much cheaper valuations.

COMMENT NOW