Stock Fundamentals

More pain ahead for YES Bank investors

Radhika Merwin | Updated on August 25, 2019

Delay in the resolution of the bank’s bad loans can weigh on the weak capital base

It was a nerve-wracking week for investors of YES Bank. The stock has fallen by over 20 per cent, as irregularities and unauthorised transactions at CG Power and Industrial Solution, came to light. YES Bank holds 12.8 per cent stake in CG Power, which it acquired in May on invocation of pledged shares of its promoter, due to default of loan by Oyster Buildwell, a group company of Avantha Group (CG Power is part of Avantha Group).

Since May, when YES Bank acquired shares of CG Power, the value of its holdings has fallen by over 70 per cent, as the stock price of CG Power plunged from ₹37 to ₹10 per share during this period. This implies an erosion in value of its holdings in CG Power of about ₹200 crore. While the bank’s actual exposure to the Avantha group company is not known, a look at the MCA data, reveals that a charge of about ₹500 crore was created on CG Power’s assets as security last year (this is not necessarily the bank’s current exposure to the company, as charges are created when a loan is sanctioned and subsequent disbursement and repayment will not be reflected in the charge).

Nonetheless, compared to the bank’s exposure to other stressed companies such as DHFL, IL&FS, ADAG or Essel, the impact of fraud-hit CG Power by way of possible write-offs may seem less significant (based on publicly disclosed figures). But the stock was beaten down for three consecutive days on CG Power-related news.

More slippages




Since the IL&FS crisis and troubles at DHFL, the market has understandably turned jittery. With many banks reporting rise in NPAs and weak performance in the latest June quarter, concerns emerging in new names, only suggest that banks can see more slippages in the coming quarters. For YES Bank in particular, the ₹29,000-odd crore of stressed book (BB and below rated) that mainly pertains to the four or five stressed companies (in the limelight recently), has investors worried. Unless there is resolution in these accounts, the bank’s capital may come under pressure. Growth in loans, which has slowed substantially, could further slip, impacting earnings.

Stressed book

YES Bank, predominantly a corporate lender, has about 64 per cent of its total loans pertaining to the corporate segment — about ₹1.5-lakh crore as of June 2019. The bank has a total bad loan book of ₹12,000 crore as of June (mainly corporate) and its stressed book as of now is about ₹29,000 crore (about a fifth of its corporate loan book). A chunk 70-80 per cent of the bank’s stressed book pertains to four or five accounts — DHFL, IL&FS, Essel, ADAG, CG Power — and hence provisioning (if resolution does not happen) could remain high in the coming quarters, eating into earnings and capital. Given the bank’s weak capital ratios, this is a cause for worry.

The bank had raised about ₹1,900 crore recently through a QIP, which resulted in its CET 1 ratio (common equity tier-1) inch up to 8.6 per cent from 8 per cent earlier (regulatory requirement is currently at 7.375 per cent). If resolution in these key accounts is delayed or the bank has to take a significant haircut, it will have to raise more capital soon, leading to further dilution for investors. As such, the sharp fall in stock price recently, will add to their woes.

Hurting growth

Given that the bank’s provision cover is low at about 43 per cent, it also has little buffer to absorb sudden rise in slippages. This could also keep the pressure on the bank’s capital.

A weak capital will impact YES Bank’s credit growth, which has been muted in recent quarters. A sharp slowdown or possible shrinkage in loans to conserve capital, can hurt the bank’s earnings further, in turn impacting its capital position.

A quick resolution of the stressed accounts will be critical for the bank to break out of this chicken and egg situation. YES Bank reported stellar growth in loans — 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).


From a lofty two to three times the price-to-book in the past, YES Bank’s valuation has fallen sharply to just half its book (0.5 times June quarter book value).

But akin to the valuations of PSBs, investors need to consider the adjusted book value (adjusted for net NPAs and portion of stressed book that can be written off) in this case too.

If we do, then YES Bank that trades at about 1.5 times the adjusted book may not be cheap, given the uncertainty over its stressed book. Investors should stay clear of bottom fishing, and wait for more clarity on resolution of stressed accounts, before taking the plunge.

Published on August 25, 2019

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