YES Bank December quarter results confirm the worst fears

Even as the Cabinet approved the reconstruction plan for the crisis-hit YES Bank and various lenders stepped in to bail it out, the keenly awaited December quarter results for YES Bank that came late Saturday have thrown a spanner in the works on the laboriously put out rescue plan.

Sharp rise in bad loans and provisioning leading to the bank breaching the RBI’s CET 1 (common equity) ratio requirement, significant decline in deposits resulting in the breach of the liquidity coverage ratio (LCR) norm of the RBI, the bank breaching its loan covenants on its foreign currency debt and, more critically, breaching the regulatory requirement on statutory liquidity ratio (SLR) — all suggest the blatant attempt by the bank, in the past, to sweep the mess under the carpet.

Consider this. The bad loans have spiked to ₹40,709 crore in the December 2019 quarter from ₹17,134 crore in the September quarter. The provisions for bad loans has seen a ten-fold increase to ₹22,328 crore in the December quarter (hence the bank reporting a loss of ₹18,560 crore). Its CET 1 ratio has plummeted to 0.6 per cent (from 8.7 per cent in September quarter) as against the RBI requirement of 7.375 per cent.

More seriously, the bank has seen a huge outflow of deposits since the September quarter — about ₹44,000 crore between September and December quarter and another ₹28,000 crore subsequently. Also, interestingly, the bank’s inability to raise capital had led breach of loan covenants on its foreign currency debt and credit rating downgrades, resulting in partial prepayment of such debt (₹8,500 crore in February out of the total ₹13,000 crore borrowings).

All of this resulted in the bank’s LCR slipping 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. The LCR requires that the stock of liquid assets should equal to 100 per cent of the total net cash outflows over 30 days.

The disastrous December quarter results and skeletons tumbling out of YES Bank’s book cast a huge cloud now over the rescue plan dished out by the regulator and the Centre for the ailing bank.

Is the worst over?

After the recognition of significant stress in the December quarter and the provision cover moving up significantly to 72.7 per cent (from 43 per cent in September) — that has led to breach of key regulatory ratios — the question is whether this covers the chunk of the write-offs from the bank’s book.

After all, even after taking into account the capital infusion by various lenders including SBI, the bank’s core CET 1 capital ratio is just above the regulatory requirement.

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

Taking this capital infusion into account, YES Bank’s CET 1 ratio would scale up to 7.6 per cent (from 0.6 per cent), which is just barely above the regulatory requirement. This is after considering the writedown of ₹8,415 crore of AT 1 bonds (the Cabinet’s approved scheme had no mention of it).

Will the bare bones capital suffice to absorb future losses and fund the bank’s growth? The bank’s advances have been declining and in the December quarter it further fell by 17 per cent (over September quarter).

The ongoing investigation by the Enforcement Directorate into some aspects of transactions of the founder and former MD & CEO Rana Kapoor and alleged links with certain borrower groups, could have further impact on the financials of the bank.

The independent auditor’s review report (BSR & Co. LLP) points out that while based on the projections of the bank for the next two years (approved by the administrator), the proposed capital infusion and lines of liquidity provided by the RBI, the bank opines that it will be able to discharge its liabilities, a lot depends on the success of the final reconstruction scheme, the quantum of capital infused and the bank’s ability to stabilise its deposits post withdrawal of moratorium by RBI.

Liquidity trouble

Banks maintain a portion of their deposits as statutory liquidity ratio (SLR) in the form of government securities that are highly liquid and can be easily sold to raise money. From January 2015, banks are also required to meet the guidelines on the minimum LCR set out under Basel III. Breaching both SLR and LCR requirements is a serious matter.

YES Bank has seen outflows of ₹71,000 crore of deposits since September. Corporates have been more nimble and have pulled out ₹32,000 crore of term deposits between the June and December quarter, while retail customers have pulled out about ₹12,000 crore of term deposits. Currently the bank has total deposits of ₹1,37,506 crore. When the restrictions on withdrawal of deposits is lifted on March 18, how far the bank is able to stem the outflows will be critical.