At the end of March and after an unprecedented mega bail-out, Yes Bank still has a broken balance sheet and its continuation as a going concern depends on several ifs and buts.
Yes Bank’s fourth-quarter numbers, released on Wednesday night, showed a surprise profit of Rs 2,629 crore. But the celebration was short-lived. That was an accounting twist if one adjusts the amount net of taxes received from write-down of AT1 (additional tier 1) bonds, around Rs 6,297 crore. Exclude this one-off, the bank has posted a loss of Rs3,668 crore.
But that’s not the story here.
At the end of March quarter and after an unprecedented mega bail-out early this year, Yes Bank still has a broken balance sheet. Its continuation as a going concern depends on several ifs and buts. Investors and analysts look at its numbers with suspicion. The ship isn’t past the stormy waters yet.
What is missing in Yes Bank is what it needs most now—trust. The bank has seen major erosion in deposits in the March quarter as people moved to safer banks. Advances have declined sharply. And its capital ratios are way below the Reserve Bank of India’s norms.
What is bad?
There are not many takers for Yes in the market, even after the mega rescue. “The question you should ask is one year down the line, how will this bank step up its business,” said Siddarth Purohit of SMC Global Securities. “When there are better options available in the market, why would one investor look at this bank,” said Purohit.
Yes’ deposits have shrunk to Rs 1.05 lakh crore, down 54 percent in Q4 compared with Rs 2.27 lakh crore in the year-ago quarter while advances shrank 29 percent y-o-y to Rs 1.7 lakh crore from Rs2.4 lakh crore in the year-ago quarter.
The bank’s capital position, as mentioned above, is precarious.
Yes Bank needs capital, and lots of it. All the critical capital ratios have breached the regulatory redline. The CET 1 ratio (common equity tier 1 ratio) and the Tier 1 capital ratio for the bank as at March 31, 2020, stood at 6.3 percent and 6.5 percent as compared to the minimum requirements of 7.375 percent and 8.875 percent respectively.
This implies that the bank will have to raise capital soon to meet the mandatory ratios and even more to augment its business. Similarly, the liquidity coverage ratio is way below the required level at 34 percent. Also, about 40-45 percent of the customers have accepted the moratorium facility extended by the bank.
This indicates significant stress in the portfolio. How much of this could turn to NPAs is something to watch. For every loan that turns bad, the bank needs to set aside capital to cover the likely losses, called as provisions. In short, to reach a minimum 10 percent CAR, the bank will roughly need at least Rs 9,000 crore additional for NPA provisions and LCR compliance and finally to amass the growth capital if it wants to grow its loan book when things stabilise.
Capital is unlikely to be a concern for the bank given the backing of half of the banking industry and blessings of the RBI. But one needs to wait and see how this plays out.
The good side
There are some good signs. The asset quality indicators, post write-offs and recoveries, look better than the December quarter. The special mention accounts (SMA) of Yes Bank (loans that are overdue) has declined a bit. The gross non-performing assets (GNPAs) of the bank stood at 16.8 percent compared with 18.87 percent in December. Net NPAs in the March quarter stood at 5.03 percent compared with 5.97 percent in the December quarter.
According to Prashant Kumar, the RBI-appointed CEO of the bank, the retail deposit outflow from the bank post the moratorium period has stabilised beginning April 1. The bank also wants to replace bulk deposits with retail deposits. There is also a plan to segregate the bad loans into a separate segment (a bad bank?) and segregate the standard portfolio. If these work out as Kumar hopes, the bank can clean up its mess to an extent. Again, a waiting game.
An ugly past
The surprise profit Yes Bank managed to show in Q4 is the value lost for hundreds of AT1 bondholders. They are the real victims in the Yes Bank story.
There’s about Rs 8,415 crore worth of investments which were vanished into thin air post write-down. But the ghosts of vanished AT1 bonds will return to haunt the bank as it will be dragged into endless courtroom battles.
Investors represented by Axis Trustee have already moved the Bombay High Court seeking court’s intervention in the matter. That apart, hundreds of retail investors whose money is stuck in AT1 bonds are also likely to move courts seeking judicial intervention in the matter. Yes Bank has to clear a lot of mess before customers and investors say ‘Yes’ to the bank once again.