Yes! There’s a price for governance
The stock market hanged Yes Bank on Friday after it learnt that its gross NPAs (non-performing assets) as of March 31 2016 ought have been Rs 4,925 crore or 5 percent of the book, and not Rs 749 crore or 0.76 percent as the bank had reported.
The stock market hanged Yes Bank on Friday after it learnt that its gross NPAs (non-performing assets) as of March 31, 2016 ought have been Rs 4,925 crore or 5 percent of the book, and not Rs 749 crore or 0.76 percent as the bank had reported. Brokerages who have “buy” recommendations on the stock immediately put out sales notes saying the Rs 4,176 crore of extra default loans had either been recovered by Yes Bank over the course of FY17, or sold to asset reconstruction companies or recognized as NPLs. There is no immediate danger to the P&L, they argued.
However, the angry reaction in the market was almost entirely because now the balance sheet and the P&L of the bank become suspect. Yes Bank up until Jan 2016, traded at maximum 2 times its book value. Market always believed the bank had high funded and non-funded exposure to infrastructure, power, steel and such vulnerable sectors. However perception on Yes Bank changed in early 2016.
In Dec 2015 RBI mandated its asset quality review forcing banks to recognize as NPAs most of the vulnerable loans that had been evergreened in the hope of repayment. Corporate lenders like ICICI Bank, SBI, Axis Bank and the entire PSU banking group declared huge incremental NPLs. Yes Bank’s P&L showed no impact at all. Gross NPAs remained at 0.76 percent. Almost since the day Yes Bank declared its 3Q Fy16 numbers it started getting better valuations. Its price rose steadily from 800 rupees to 1600 in Jan 2017, taking its valuation from 2 times to 3 times book. Who are we to suspect the book, when the bank’s NPAs remain below 1 percent despite RBI’s asset quality review, argued the last of the skeptics. It was this confidence that enabled the bank to raise capital at nearly 2.7 times book in the last week of March. And it was this confidence that got dented on Friday.
Post Q4 results the stock had risen all the way from 1550 to 1640, almost 3 times book. A day’s anger took the share to 1483, i.e. below its QIP price. The market’s anger is understandable. The bank had two occasions to share the RBI’s observations. It could have revealed the RBI’s report during the QIP or even deferred the QIP to after Q4 results. It could most certainly have revealed the RBI’s observations during the Q4 results. It will be interesting to see if the stock finds support around the QIP price on ground that the bank wont repeat its mistake, or on the argument that even if it has exposure to vulnerable sectors, it has better collateral or is better able to manage these defaults. Incidentally, the other corporate lender Axis also has a sizeable extra NPA of Rs 9,500 crore which it had reported as standard, but the RBI thought otherwise. ICICI comes out looking better with only 1 percent divergence. But where Axis and ICICI score over Yes is, these two revealed the RBI’s inspection report to their investors during the Q4 results. It is possible some investors will move a part of their holdings in Yes to Axis and ICICI.
Even as the market expresses its ire over Yes Bank’s shares, a word in favour of bankers. The RBI inspects banks’ books a good 3-6 months after they announce their audited numbers. It is important to note that some discretion is involved in judging whether a loan is NPA or not and whether it should be provided for or not. The 90-day norm is not mechanically applied by RBI or the banks. Both take into account the rating agencies’ views, the global prices of commodities, any possible capex that will start commercial production, any possible asset sale, mergers, and capital raising contemplated by the promoters. The point is, there are a lot of grey accounts. An account may have a lighter shade of grey in March when the bank is closing its books, but 6 months later the RBI inspector, with the benefit of hindsight may find the account more black than grey. When the economy is slowing and even going through demonetization, the number of grey accounts looking black after 6 months may be even more. RBI asking banks to provide for these accounts is fair. But to call all these instances “divergence” and implicitly accusing bankers of prevarication is unfair. After all these books are signed by auditors, and the ex-post verdict of RBI can expose the bankers and their auditors to even class action suits.
May be RBI in concert with SEBI and the exchanges should contemplate asking banks to reveal the inspection results when they are announced or at least during the next quarterly results announcement following the inspection report.It will be interesting to see whether there are big difference in the NPAs reported by PSU banks and how RBI assessed them. Our sources say there won’t be big divergences at least in the big state owned banks. This is partly because these banks, have already declared bulk of their NPLs as per RBI’s AQR diktat. The divergence may also be less for state owned banks because their employees are not rewarded with ESOPs and don’t have the same compulsion to show higher earnings. Nor do these banks have the same compulsion to raise capital from the market. Yes! markets are a double-edged sword.