| Tuesday, 14 July 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Yes Bank Still not out of the woods Covid-19-related economic slowdown to intensify the struggle with capital, liquidity and NPAs
Yes Bank was under moratorium, under Section 45 of the Banking Regulation Act, 1949, from 5 March up to 3 April 2020. The RBI, in consultation with the Central government, and in exercise of its powers under Section 36ACA of the Act, superseded the board of directors. The Union government on 13 March notified the Yes Bank Reconstruction Scheme 2020. The board was reconstituted with eight professionals from the banking industry. State Bank of India (SBI) and other investors including Housing Development Finance Corporation (HDFC), ICICI Bank, Axis Bank, Kotak Mahindra Bank (KMB), Federal Bank, Bandhan Bank and IDFC First Bank invested Rs 10000 crore at a price of Rs10 per equity share. SBI is required to hold at least 26% of the equity share capital for three years from the date of allotment but will not own more than 49% of the equity share capital. Prashant Kumar, the new Managing Director (MD) and Chief Executive Officer (CEO), has over 35 years of experience in the banking field. In his long service in SBI, he worked in credit, retail banking, human resources and strategic training and finance disciplines. Since the implementation of the reconstruction scheme, new strategic objectives have been formulated to augment the deposit base and liquidity buffers, optimize operating costs, build stronger governance and underwriting framework and focus on stressed assets resolution. Total assets declined from Rs 312447 crore end March 2018 to Rs 257832 crore end March 2020. Deposits dipped from Rs 200689 crore to Rs 105311 crore. Advances eased from Rs 203519 crore to Rs 171433 crore. Wholesale banking accounted for 64% and the business andretail banking divisions 36.32% of the total advances. The current-account-savings-account (Casa) ratio stood at 26.63% end March 2020. Net loss of Rs 16433 crore in FY2020 was due to heightened slippages and the consequent provisioning. Going forward, the foundation is being rebuilt and growth is being calibrated for the next six to 12 months, with the focus on liabilities and liquidity buffers, optimizing cost, strengthening the governance and underwriting framework and stressed assets resolution. The medium-term objectives are to stabilize the liability mix and lower the cost of funds to increase the Casa ratio to more than 40%, provide granular advances, with the share of retail, small and medium enterprises (SMEs) aimed at more than 60%, enhance corporate flows and cross-selling through transaction banking and grow return on assets to above 1% within one to three years and above 1.5% within three to five years. The target is to develop a scalable platform on the back of retail and SME advances. Strategic initiatives include financing vendors of corporates, tie-ups with trade and industry and expanding the liability business through branches andcustomer relationship management- based sourcing. There were 50 dedicated SME branches in SME hubs end March 2020. The balance sheet size of the banking unit of the International Financial Services Center in Gift City, Gujarat,was US$ 1868.8 million end March 2020. The three wholly owned subsidiaries are Yes Securities, Yes Asset Management (Yamil) and YES Trustee (YTL). Yes Securities undertakes merchant banking, investment banking, institutional sales and trading and equity research. Yamil offers investment management services. YTL acts as a trustee to Yamil. The Offer and the Objects The follow-on public offer is to collect around Rs 15000 crore by issuing fresh 1,250-crore shares of face value Rs 2 per share at lower price of Rs 12 per share and 1153.8-crore shares at the upper band of Rs 13 per share. The issue,through the book-building process, will open on 15 July 2020 and will close on 17 July 2020. The net proceeds will be utilized to ensure adequate capital to support growth and expansion, including enhancing the solvency and capital adequacy ratios. The common equity tier (Cet) I ratio was 6.3% end March 2020. The minimum Cet I ratio requirement will increase to 8% by 30 September 2020. Adequate liquidity is necessary to comply with the RBImandate on the Cet I ratio and support growth. Covid-19 impact In accordance with the RBI guidelines oncovid-19 regulatory package, a moratorium of six months has been offered on payment of all unpaid installments and interest due between 1 March 2020 and 31 August 2020 to all eligible borrowers classified as standard on 29 February2020. The overdue exposures had a total outstanding amount of Rs 15010.55 crore end March 2020. Standstill NPAswere Rs 2712.95 crore as against provisioning of Rs 237.84 crore. Covid-19 adversely affected the near-term global as well as domestic growth outlook. The RBI has said the combined impact of demand compression and supply disruption will depress economic activity in H1 of FY 2021. However, assuming a phased restoration of economic activity, especially in H2, and considering a favorable base effect, the central bank expects a combination of fiscal, monetary and administrative measures that have been undertaken to create conditions for a gradual revival in activity in H2. Strengths Full-service operations include merchant banking, digital banking, brokerage business, asset management and investment banking. Thereare 1,135 branches and 1,423 ATMs, covering all 28 states and eight Union Territories in India and one representative office in Abu Dhabi. The extensive network includes 250 hub branches and 850 spoke branches. About 85% of the branches are more than three-year old. Branches are geographically extensive, with 386 in metro, 236 in urban, 298 semi-urban and 215 rural locations. The differentiated technology platform has resulted in digital leadership. As a new generation entity, investment has been made in the latest technology infrastructure and applications to enhance customer experience across all service delivery channels, including digital banking. A 29.5% market share demonstrates leadership in the segment. The reconstruction scheme has brought in marquee institutions such as SBI, HDFC, ICICI Bank, Axis Bank, KMBank, Federal Bank, Bandhan Bank and IDFC First Bank. A new board, CEO and MD and Non-Executive Chairman have been appointed from experienced professionals Weaknesses Care Ratings on 9 March 2020 downgraded the Basel III additional tier I bonds, Basel III tier II bonds, Basel The gross NPA (GNPA) ratio was 16.80% and the net NPA ratio at 5.03%, with a provision coverage ratio of 73.77%, end March 2020. If the benefit of the standard asset classification on advances and the moratorium granted by the RBIhad not been availed, the GNPA would have been higher by Rs 2712.94 crore. Post covid-19, moratorium on loan repayments has been offered to customers. By value, moratorium opted by corporate customersrange from 40% to 45%, micro, small or medium enterprises35% to 40%, and retail customers 40 to 45% of the total loans. Chances of these loans going bad or needing restructuring is high compared with rest of the loans. Certain statutory requirements on financial ratios are in breach. The situation may continue. The Cet I ratio was 6.3% compared with the minimum requirement of 7.375%. The minimum statutory liquidity ratio and liquid capital ratio requirements of the RBI were also breached in FY 2020. Assets and liabilitiesface maturity and interest rate mismatches. Liquidity gaps were negative for certain maturity periods up to one year. Any asset-liability gap can adversely affect liquidity. Higher interest rates will have to be paid to attract or retain deposits Loans are concentrated with specific borrowers, particularly corporates. The top 20 advances represented 11.62%of the total advances. Any deterioration in the credit quality of these assets will adversely affect the credit portfolio quality and financial performance. Advances to the corporate sector totaled 55.85% of the total advances. Certain restrictive covenants contained in financing arrangements have been breached. Business will be hit if the lenders choose to exercise their rights for the breach. Payment of interest on outstanding hybrid debt capital instruments is subject to certain regulatory restrictions prescribed by the central bank. The recent moratorium imposed by the RBI and writing off additional tier-1 bonds has taken a toll on reputation with depositors as well as bond holders. A whistle-blower has complained of alleged irregularities in operations, potential conflicts of interest of former MD and CEO Rana Kapoor and incorrect NPA classifications. Besides an internal enquiry, an independent investigation by an external firm was commissioned. An investigation was launched by the Enforcement Directorate, leading to the arrest of Kapoor. SBI directly holds 48.21% of the equity share capital. Any increase in the equity shareholding or extent of control of government-controlled entities will call for compliance with additional regulatory requirements that public sector entities or government-controlled companies have to follow. Ability to conduct business in line with current practices enjoyed by private sector banks will be restricted. Valuation The book value (BV) is Rs 17.3. Post-issue, the BV works out to Rs 14.6 at the issue price of Rs 12 and Rs 15.2 at the issue price of Rs 13. The post-issue adjusted BV is Rs 11.2 at the issue price of Rs 12 and Rs 11.7at the issue price of Rs 13. P/BV and P/adjusted BV (ABV)works out to 0.86 and 1.1. Among comparable peers, Indusind Bank is trading at P/ABV (on FY 2020 ABV) of 1.2 times, IDFC First Bank at P/ABV of 0.9 times and Federal Bank at P/ABV of 0.8 times. The scrip was trading around Rs 21 on 14 July 2020. However, all new marquee investors, whose investments is breathing life, invested at Rs 10 in March 2020 when the scrip was trading at more than Rs 25. In fact, capital was being sought, without success, for the past several months to raise equity around prevailing market prices.
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