For months, reports of an investor in sight for beleaguered private lender Yes Bank have received much ink. Yes Bank, India’s fifth-largest private lender, has been trying in vain to raise Rs 14,000 crore in fresh capital.
In January, the bank said it rejected a proposal from Canadian investor Erwin Singh Braich and Hong Kong-based SPGP Holdings to invest $1.2 billion. Few analysts were surprised by the outcome because the offer was suspect.
The bank then said it was considering offers of investment from London-based Citax Holdings and Citax Investment Group. But that deal too didn’t fructify.
Time was fast running out for the bank, which has been beset by a pile of bad loans due to its exposure to a bunch of troubled sectors.
The high drama surrounding the survival of Yes Bank could finally be coming to an end. According to a Bloomberg report, the Narendra Modi-government has asked State Bank of India (SBI) to bail out Yes Bank by forming a consortium of banks.
Yes Bank said it has not received any such communication from the Reserve Bank of India or any other government or regulatory authorities or from the SBI and we are unaware of any such decision. “The Bank in the usual and ordinary course of its business continues to explore various means of raising capital/ funds through issuance of securities to diverse set of investors to meet its business/ regulatory requirements, subject to compliance with prescribed procedures and receipt of statutory/ regulatory approvals,” Yes bank said.
How did the bank survive through these months of uncertainty?
“The mood was of desperation and the only thing that kept things going in Yes Bank was hope,” recounted a person who was closely associated with the crisis. “Since January, there was a sense of resignation internally. No one knew where things are heading to,” the person said.
It wasn’t always so. There was hope in the bank management of finding investors in the first six months after new CEO Ravneet Gill took charge. But the cheer began fading after investors, who initially appeared willing to put money on the table, turned wary due to the worsening finances and corporate governance issues.
“Only question that remained to be seen was whether the bank will still retain its identity after the takeover or will cease to exist as we know it today,” the person quoted above said.
Curtains down, finally
Asking SBI to bail out Yes Bank is not without precedent. In 2004, the erstwhile Global Trust Bank was merged with Oriental Bank of Commerce (OBC).
There have also been other distress takeovers involving private lenders. In 2006, the erstwhile United Western Bank merged with IDBI and in 2010, Bank of Rajasthan merged with ICICI Bank. But what makes Yes Bank case an exception is the size of the stressed assets involved. According to rating agency Moody's, the bank's total dud assets are likely to cross 12 percent this year.
More than 40 percent of its Rs 30,000 crore of exposure to lower-rated entities are likely to turn sticky before March. Last month, for the second time in two months, India Ratings downgraded long-term issuer rating on certain debt instruments of Yes Bank to 'A-' from 'A' and also maintained it on the rating watch 'negative'.
Banks such as Kotak Mahindra were initially rumoured to be potential acquirers but given the stress on its books, suitors disappeared. A government-bank led bailout was the only remaining option.
More than meets the eye?
Doubts have also been cast on the value of the stressed assets. “The rumour is that the actual stress is significantly bigger than what is speculated,” said Naresh Malhotra, a banking consultant based in Mumbai and a former SBI official.
A clearer picture of the bank’s troubled assets will emerge when Yes Bank announces its third-quarter results on March 14. The bank might not announce the results if the reported merger proposal with SBI turns official by then.
Analysts said Yes Bank is part of a grouping of banks whose stressed assets will increase in the third quarter by the addition of exposure to struggling businesses such as DHFL, Suzlon and Altico. Under RBI norms, banks must set aside money against doubtful assets.
The quantum of such provisions depends on how bad is the asset. Yes Bank is a corporate lender, with this segment constituting about 62 percent of the total loan book. Retail loans constitute just about 20 percent.
How the drama unfolded
During its golden days, Yes Bank was an object of envy for most competitors. It was even billed as the next HDFC Bank by a section of analysts. Successive quarters of 30 percent-plus growth and a booming corporate loan book made it an investor’s darling.
“But even then there were murmurs about the kind of growth and exposure in Yes Bank,” said Vaibhav Agarwal, senior vice-president, research at Angel Broking.
Cracks first appeared on the books of the bank when the RBI found a huge divergence in bad loan figures reported by the bank and what emerged in its inspection. In FY19 alone, Yes Bank reported a divergence of Rs 3,277 crore in bad loans and Rs 978 crore in non-performing asset (NPA) provisions.
Since then, the bank has been struggling to raise funds despite repeated commitments made by Gill to shareholders.
After equating his holding in the bank to "Diamonds that are forever", in November last year, Yes Bank's founder Rana Kapoor sold almost all of his stake in the bank. The resignation of Yes Bank's independent director Uttam Prakash Agarwal in January, citing "serious concerns" on the state of affairs at the private sector lender and deteriorating practices, further scared investors, who dumped the shares.
Yes Bank, which had earlier guided the markets with a Rs 14,000 crore fund-raising plan, in early January, said it will raise Rs 10,000 crore and called an EGM on February 7 to seek shareholders’ nod to raise its authorised capital. Analysts raised eyebrows on the repeated breach of commitment post guidance.
“We stopped tracking the stock a while ago. No client wants to touch a stock with these kinds of issues,” said a Mumbai-based analyst on condition of anonymity.
As on date, Yes Bank’s market capitalisation is just over Rs 9,500 crore. That is a shadow of the amount — Rs 14,000 crore — that it initially forecast to raise from the market to stay afloat.
What’s in it for SBI?
For SBI, there is nothing much to cheer about the Yes bank deal. To be sure, this is unlikely to have a direct impact on SBI’s books as the bank is expected to only facilitate the deal instead of taking up the majority stress on its books, bankers said. “SBI has been pressured to do this. Given an option, they wouldn’t have touched a bank like Yes,” Malhotra said.
Still, given the kind of stressed assets, including the speculated hidden assets, on Yes Bank’s books, it is a risky bet for SBI. Even in a consortium format, SBI will have to pool in significant amount of money to clean up the mess in Yes Bank.
“Ideally and theoretically speaking, SBI and other PSU banks need to buy the bank at Re 1," Macquarie analyst Suresh Ganapathy wrote in a note on Thursday commenting on the reports of Yes Bank’s takeover by SBI-led consortium.
"Yes Bank has a net worth of around Rs 25,000 crore. Its below investment grade book (BB&Below) is around Rs 30,000 crore and BBB book is at around Rs 50,000 crore. If we assume substantial proportion of BB&below book is wiped off and say 10-15 percent of BBB book is to be written off, it implies the current net worth of the bank is zero (after factoring in 25 percent tax benefits),” Ganapathy said.
SBI is getting a balance sheet with about Rs 30,000 crore loans are in the stressed category. The actual burden will be known when the full scale of Yes’ stressed assets is known by the acquirers.