YES Bank fiasco a double whammy for Max Financial

Max Life has ~2K-cr exposure to the bank’s tier-2 bonds

With losses of over 12 per cent in a week, the stock of Max Financial Services, which owns 72.5 per cent in Max Life Insurance, is back to the levels of when the news of Axis Bank acquiring stake in its life insurance business first surfaced. While there is still over two months left for the transaction to take shape, the recent turn of events has made the deal seem more important than before. Max Financial is entangled with YES Bank in two ways. As a direct hit to its business, YES Bank generated about 11 per cent of its premium through the bancassurance channel. Therefore, while February’s new business premium growth at 5.68 per cent may appear muted for other reasons, investors will have to wait for March data to gauge the extent of business loss, as YES Bank’s operations came to a grind earlier this month. Not just this, one will have to factor in the ~2,000-crore exposure which the company’s life insurance arm has in YES Bank’s tier-2 bonds.

About ~1,000 crore is parked in Max Life’s shareholders’ account, out of which ~500 crore forms part of its participating funds, and ~500 crore in its unit-linked insurance plan, which, according to the company, is vulnerable to a write-down, as these are categorised as investments heldto-maturity. Unless there is a default in the coupon payment and credit rating is downgraded to default rating (D), Max Life need not take a further mark down on its participating funds and shareholders’ account. While the mark down so far may not materially impact Max Financial’s numbers just yet, analysts at Kotak Institutional Equities caution investors to brace for 3–4 per cent reduction in value of the new business generated through YES Bank. “Risk to persistency of the back (investment) book from YES Bank is there,” analysts at Sharekhan add.

Investors need to be wary of shares pledged by promoters, who hold over 28 per cent stake in the bank. Based on its December quarter exchange filing, promoter pledge stood at 71.54 per cent of their shares.

With so many overhangs for Max Financial, the Street seems to be of the view that the deal with Axis Bank becomes more critical than before. “A deal with Axis Bank becomes even more important and can potentially offset/replace YES Bank in the long-term,” analysts at Sharekhan note, while mentioning that Max Financial may need to invest more in its proprietary channel in the near-term because of recent developments.

Hence, even if valuations at 1.6x FY21 embedded value appear attractive, investors should tread carefully.