JM Financial says while the capital infusion and AT1 bonds write-off has helped Yes Bank stay afloat, its fundamentals remain weak.
Yes Bank is the biggest gainer in this falling market. The stock has gained 1,484 percent in just eight trading sessions as the cabinet approved the Reserve Bank of India’s restructuring plan for the private lender.
The RBI, State Bank of India and new CEO & MD Prashant Kumar’s assurances to depositors were enough to boost investors’ confidence who bought the stock as other shares crashed over the coronavirus outbreak fears.
But brokerages are not convinced with this rally and some of them have suspended their coverage or maintained a “sell” rating on the stock.
JM Financial says the rally is more technical than fundamental, as while the capital infusion and AT1 bonds write-off has helped Yes Bank stay afloat, its fundamentals still remain weak.
The more than Rs 18,500 crore loss reported by the bank in Q3FY20 with pro-forma CET1 at 7.6 percent (post capital infusion and AT1 write-off) clearly shows the problem.
Gross non-performing loans (NPLs) for the bank were elevated at 18.9 percent as of Q3FY20, with provision coverage ratio (PCR) at 73 percent, and even so, the bank's press statement continued to guide for 5 percent slippages in FY21.
Further, the bank indicated that 60 percent of its corporate bond book was stressed and the PCR on the same was at 39 percent.
"As a result, we believe credit costs will continue to remain elevated for Yes bank in the medium term and the path to profitability may be prolonged. Furthermore, this implies that Yes Bank may require more equity capital infusions to maintain regulatory capital adequacy," JM Financial said.
The bank will get Rs 10,000 crore capital infusion from State Bank of India (Rs 6,250 crore), ICICI Bank (Rs 1,000 crore), HDFC (Rs 1,000 crore), Kotak Mahindra Bank (Rs 500 crore), Axis Bank (Rs 600 crore), Bandhan Bank (Rs 300 crore), Federal Bank (Rs 300 crore) and IDFC First Bank (Rs 250 crore).
The moratorium period, which included withdrawal of up to Rs 50,000, will end at 6 pm on March 18 after which Yes Bank will resume normal operations.
SBI has to keep at least a 26 percent stake in the bank for the next three years. Non-SBI investors will have a three-year lock-in for 75 percent of their investment.
"Interestingly at CMP, Yes Bank's new shareholders are sufficiently in-the-money to recover their entire investments by just offloading 17 percent of their allotted shares (since they invested at Rs 10 per share and CMP is Rs 59) versus the cap of 25 percent," the brokerage said.
"While investing banks have answered the call for capital from the regulator, we believe that they may look to offload Yes Bank shares once the allotted shares are eligible for trading," it added.
After the moratorium kicked in, a lot of mid and small sized banks saw sharp correction as well as flight-to-safety deposits to larger and “more stable” banks, though RBL Bank management said they were getting their deposits back and operations were normal.
Even Prashant Kumar said they saw more inflows than outflows in the last couple of days.
"Increasing risk aversion in the system has meant that smaller corporates/SMEs continue to struggle in terms of credit availability. In our view, the credit crunch in the economy could aggravate and thus could delay the growth recovery further," JM Financial said.
Credit costs may remain elevated, as systemic asset quality pressures for certain sectors persist, which may further be exacerbated by the Yes bank episode, the brokerage said.
Hence, it continued to prefer larger banks (ICICI Bank, HDFC Bank and Axis Bank) with better economies of scale, strong liability franchises and lower exposures to weaknesses in mid-corporates and SMEs.
"Moreover, these larger banks have seen sharp corrections and are now quoting at attractive valuations (ICICI Bank, Axis Bank and HDFC Bank trading at 1.2x, 1.5x and 2.5x FY21E BVPS for the core banking businesses)," it said.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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