Will RBI be YES Bank’s white knight?

Moody’s downgraded YES Bank’s long-term foreign currency issuer rating from “Ba3” to speculative grade “Ba1” on August 28, 2019, indicating that its debt issuance carries significant credit risk. On August 31, 2019, India Ratings downgraded YES Bank from “Ind AA-”to Ind “A+”. The bank’s shareholders have lost 84 per cent in share value year-on-year (its share price plunged to ₹59.45 on September 4, 2019 from ₹366 on August 29, 2018).

Default risk

Chart 1 displays the reported and likely defaults which will bring the bank’s NPA level to over 17.5 per cent of its reported advances, worth ₹2,36,300 crore as on June 30, 2019. The top 5 borrowers account for 54 per cent of these total defaults. Most of YES Bank’s borrowers have pledged promoter shares as a collateral to not only with YES Bank alone, but also with multiple lenders and mutual fund houses (i.e. 20-100 per cent of promoter-pledged shares as a percentage of total promoter shares).

Generally, this is fine, but can prove to be a risky scenario if the other lenders liquidate their collateral and cause the borrower shares to plummet, resulting in a significant decrease in collateral value. In such a scenario, a borrower might not be able to bring in additional collateral of promoter shares to YES Bank as a buffer, increasing the possibility of default and thus leading to increased NPA.

Given the total default, let us consider YES Bank’s financial metrics (Chart 2). Between March 2018 and June 2019, YES Bank’s Capital Adequacy Ratio (CAR) has dropped 270 basis points. To shore up its CAR, the bank has raised capital worth ₹1,930 crore via a Qualified Institutional Placement (QIP) — which seems a temporary and one-time infusion of capital that might moderately improve the bank’s reported Common Equity Tier 1 (CET1) ratio to 8.6 per cent from 8.0 per cent as on June 30, 2019 (RBI norm is 7.375 per cent) — but will be hugely insufficient to cover the probable defaults.

The last two quarters have witnessed a steady decline in the net interest income, and a net loss was reported in March 2019 due to the increasing provisions; a trend likely to continue in the near term due to probable defaults. With signs of YES Bank’s CET1 steadily on the decline, limited ability to raise capital and rising NPAs, it will not be long before the bank comes under RBI’s Prompt Corrective Action netwrok — NPA crosses 10 per cent of advances, CAR drops below 9 per cent, and the bank incurs a net loss in subsequent quarters. The RBI will eventually restrict YES bank’s lending and deposit-accepting capabilities, seeking a suitable partner for a merger or takeover.

Potential options

With this possible scenario, one is reminded of Global Trust Bank (GTB). GTB had advances worth ₹3,276 crore and deposits worth ₹6,920 crore. The Ketan Parekh incident left GTB with a GNPA of ₹1,100 crore, ie 33.78 per cent of advances. An RBI inspection found that GTB’s net worth was negative, and then began a six-month search for a suitor, with Oriental Bank of Commerce becoming the finalised acquirer. YES Bank has advances approximately 72 times that of GTB, GNPAs more than 10 times than that of GTBand total defaults 37.78 times of GTB’s GNPA.

So, in the current climate , the question is who will merge with or take over YES Bank, given the fragile state of the Indian financial system and the mega bank mergers announced on August 31, 2019? The probable list of acquirer candidates has shrunk, and like GTB, does YES Bank have the leisure of time to wait for six months to search for an acquirer?

The regulator is left with very limited options and might force the largest private or public sector bank to acquire YES Bank. But before this, the question that broadly looms is: “Will RBI become YES Bank’s knight in shining armour or will it let it wilt into its doom?”

Bawa is Assistant Professor of Finance, FLAME University. Basu is Professor of Finance, Indian Institute of Management-Bangalore

YES Bank replies

Rejoinder to article in BusinessLine , September 13

With reference to the article ‘Will RBI be YES Bank’s white knight’ ( BusinessLine , September 13), we would like to express our concern in the manner the article has been written, which is speculative with a seemingly malafide intent. The factual accuracy of the information quoted in the article is seriously questionable as there are multiple data points which are inaccurate. Therefore, any analysis which is based on speculative and inaccurate information including loosely worded terminologies is bound to result in distorted/misleading outcomes for the reader as observed in this instance.

To illustrate, the article speculates that ‘‘likely defaults will bring the bank’s NPA level to over 17.5 per cent.” We would like to state that the Bank’s reported GNPA as of June 30, 2019 was 5.01 per cent. The BB and Below Book is standard and the authors are fear mongering to potentially manipulate markets.

Comparing YES Bank to Global Trust Bank and mentioning ‘it will not be long before the bank comes under RBI’s Prompt Corrective Action framework’ is a clear indication of speculation and bringing disrepute to a banking institution. YES Bank is the fourth largest private sector bank with advances market share of 2.5 per cent with a pan India presence across 1,100+ branches. The bank’s total capital adequacy ratio at 16.2 per cent is one of the highest in the banking space with aggregate capital funds in excess of ₹50,000 crore. Further, YES Bank’s Gross NPA ratio at 5.1 per cent is significantly lower than industry NPA of 9.3 per cent. The bank’s liquidity and funding remain stable as reported through the result of Q1 FY19 with liquidity coverage ratio of 132.6 per cent.

Given the above context, we strongly urge you to exercise appropriate diligence and discretion while publishing such articles as it can have severe consequences with various stakeholders.

This is very serious as it results in significant damage to our reputation.

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Data sources

The financial information of YES Bank compiled for the past periods is from the financial disclosures made by them, ICRA report published on 24 July 2019; data for pledged shares invoked from BSE filings for YES Bank; and the respective companies, Index of charges on Ministry of Corporate Affairs website, the Chart 2 figures, are based on the quarterly disclosures made by YES Bank under their Investor relations tab under financial results section “notes on results”.

The specific responses to YES Bank mail is as follows:

1. ‘To illustrate, the article speculates that ‘‘likely defaults will bring the bank’s NPA level to over 17.5 per cent.” We would like to state that the Bank’s reported GNPA as of June 30, 2019 was 5.01 per cent. The BB and Below Book is standard and the authors are fear mongering to potentially manipulate markets.’

a) The GNPA of 5.01 per cent for June 2019 is reported under Financial Metrics (chart 2) column number 7 and row number 5. The number of 17.5 per cent is arrived at by dividing ₹41,558 crore by ₹2,36,300 crore. ICRA reported GNPA and BB and B below rated advances i.e. ₹41,558 crore. Advances i.e. ₹236,300 crore (reported in YES Bank June 2019 Q1FY20 quarter - Advances). It may be noted that is reported as the likely NPA level that might be reached if all the defaults were to happen.

b) The source for the ICRA reported numbers (page number 2 , under rationale, second paragraph) for YES Bank dated 24 July 2019 is 'YBL’s gross non-performing advances' (GNPAs) and BB and below rated exposures increased to ₹41,558 crore as on June 30, 2019 from ₹ 30,772 crore as on March 31, 2019.

c) The advances figure is also the same in YES Bank investor relation, investor update Q1FY20 (page number 1, Table titled Key Balance Sheet Ratios) .

d) GNPA number reported in YES Bank Investor presentation is ₹12,902 crore (page number 7) and BB and Below rated number is 9.4 per cent i.e. ₹29,470 crore (page number 8) , (Advance numbers: Page number 24). Thus the total adds ₹42,372 crores which is very close to the ICRA number (used by the authors) of ₹41,558 crore.

2. The Total CAR as on June 2019 was 15.7 per cent, taken from the YES Bank Key Balance Sheet Ratios . (row number 2).

3. BSE filings for invocation of pledge:

a) VCL

b) Everready

c) Dion Global

d) Cox and Kings

e) CG Power

f) Russel -YES Bank loan facilities

4. GTB had advances worth ₹3,276 crore and deposits worth ₹6,920 crore. YES Bank has advances approximately 72 times that of GTB i.e. YES bank advance (₹2,36,300 crore) divided by GTB advance (₹3,276 crore), GNPAs more than 10 times than that of GTB (₹12,000 crore of YES Bank GNPA divided by ₹1,100 crore GTB GNPA) and total defaults 37.78 times of GTB’s GNPA (₹41,558 crore i.e. GNPA + BB and below rated divided by ₹1,100 crore for GTB).

5. The article has also mentioned that the Total default = Actual default i.e. GNPA + Probable default. Probable default is mentioned as BB and Below advances under Chart no.1 explicitly.

Editor’s Note: The market capitalisation figure of ₹14,995 crore in the original article has inadvertently appeared as ₹995 crore in the print edition. The error is regretted. We stand by the data. The writers’ views are their own and not the newspaper’s.