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22 March 2020

The rescue of Yes Bank has changed the risk profile of equity and debt and undermined confidence in FII presence

The State Bank of India stepping in to rescue India’s sixth largest private bank by branches and the fifth largest by assets is a continuation of as well as a break from past practices. The usual playbook is a larger and reasonably sound government-owned bank directed to scoop the rotten entity. The overriding objective is to protect the depositors. Global Trust Bank was merged with Oriental Bank of Commerce in July 2004. IDBI was told to take over United Western Bank in October 2006. In the process, the acquirer is punished for no fault. It has to hope that the addition of bad loans on its balance sheet is neutralized to some extent by the business from the expanded branch network. In the short term, the higher provisioning crimps the ability to lend. In a departure, SBI will be a strategic investor as Yes Bank will retain its identity for now. India’s largest lender will buy up to 49% equity at a premium after the capital is expanded over six times. The news propelled Yes Bank over 30% but pulled down SBI 12% in a day. With chances slim of fully writing back Rs 34000 crore of dud assets, equity infusion even up to Rs 10000 crore from the initial Rs 2450 crore has got a decent shot of earning returns. Yes Bank’s net worth has not turned negative like that of GTB in FY 2002 and United Western Bank’s capital-to-risk-weighted asset ratio end June 2006. The new-gen private bank’s net NPAs climbed up to a high of 4.35% in Q2 of FY 2019, from 0.84% a year ago, but are lower compared with UWB’s net NPAs of 5.66% end March 2006 as against the peer group figure of 1.97%. If the three-year lock-in is a downside, it will afford the struggling institution breathing space to repair the bottom line without worrying about volatility in the trading ring. The participation of SBI will stem the flight of deposits. It has emboldened ICICI Bank, HDFC, Axis Bank, Kotak Mahindra Bank IDFC First Bank and Bandhan Bank to open their cheque books.

During its merger in July 204, GTB shareholders did not get any stake in OBC. UWB investors were better placed. They were offered Rs 28 a piece, marking about 30% premium over the previous day’s closing price.  Those of Yes Bank can entertain the possibility of reaping capital appreciation in the medium term. The losers are the subscribers to the Rs 8415-crore perpetual bonds. The debt, forming part of the Tier 1 capital, has been extinguished. It made sense to get rid of the costly capital during the restructuring period. The immediate fallout will be drying up of inflows into banks looking to sell the high interest-bearing instruments without maturity. These were also a steady source of rich yields for mutual funds. The RBI’s action clashes with the objective of initiating bankruptcy proceedings, where creditors get precedence. Clarity is needed from the central bank if it wants to rewrite the traditional view of equity being more rewarding but risky than fixed income instruments. 

Besides the interest of those with an exposure, the outlook of the banking sector, too, hinges on how quickly Yes Bank shakes off the Rs 18564-crore loss incurred in the December 2019 quarter. The road to profitability will pave the way for the Union government to bring down its holding  in PSU banks to the 49% level and restore confidence in entrepreneur-driven banks that had begun to dent after some of them were pulled up by the RBI for governance issues and under-reporting of bad loans. As it is the private space has an uneven track record since being opened up. Of the 10 private sector entities given licences in 1993-94, Times Bank became the first to be merged with HDFC Bank in February 2000 by swapping shares. GTB became a source of funds for Ketan Parekh to rig stocks.  Bank of Punjab was acquired by Centurion Bank in June 2005 to form Centurion Bank of Punjab. Three years later, HDFC Bank took over Centurion Bank of Punjab. The 65% survival rate in 25 years raises the question if even the remaining eight are too many at a time nationalized banks are being merged to achieve scale. If phone banking undermined PSU banks, private banks relied on real estate, infrastructure and financial services to grow quarter after quarter. Retail investors are told to take comfort in the presence of big-ticket investors when fishing for stocks. Goldman Sachs and IFC were the shareholders of GTB when it went down. Foreign investors controlled 15% and mutual funds 5% of Yes Bank. When it comes to banks, investors will now have to scrutinize the quality of its borrowers, too.

-Mohan Sule