Private lenders’ bailout of YES irks investors

Banks should’ve conserved capital before bailing it out, say experts THE COMPASS

It was yet another day banking and financial stocks would like to forget in a hurry. Over the weekend seven private lenders collectively pooled in ~3,950 crore to bail out the beleaguered YES Bank. The seven private banks are HDFC, ICICI Bank, Kotak Mahindra Bank, Axis Bank, Bandhan Bank, Federal Bank, and IDFC First Bank.

Given that the investment was made at ~10 a share, the same as what State Bank of India (SBI) paid, Monday’s 45 per cent appreciation in the YES Bank stock to ~37.10 could prompt many to think that these lenders have indeed made a good investment. However, part of the reason for

Monday’s surge was technical, with the NSE advancing the exclusion of YES Bank's stock from Nifty indices by about a week to this Thursday. The compulsory lock-in of 75 per cent holding of existing investors (owning over 100 shares), which reduced supply in the counter, also helped.

So, the rally’s sustainability from hereon will depend on YES Bank’s financial capabilities. That said, the participation of banks and HDFC does throw up two critical questions. One, whether the banking sector is on the verge of witnessing very selective participation from investors, and two, whether the timing of investment was right. “We have seen no private interest so far in the bank (YES) and given the deterioration in the business, banks/the RBI will have to continue to provide both liquidity and capital to the bank,” say analysts at Nomura.

The larger debate is whether it was appropriate for peers to bail it out. “The intention is also to prevent a contagion (run on deposits with private banks),” says Ajay Bodke, CEO and chief portfolio manager, Prabhudas Lilladher. “But still, this is a large cheque to write for these lenders, especially when business is turning tough even for these lenders and capital for the system is getting expensive,” he adds.

In this context, Lalitabh Shrivastawa of Sharekhan feels if these sums were retained by the banks, it would have certainly made a positive difference to their financials. Concerns expressed by analysts largely stem from the fact that growth has been on a slowmode and barring ICICI Bank, asset quality pressures haven’t quite eased for these lenders.

In addition, Shriram Subramanian, MD, Ingovern, says the decision to invest in YES Bank by its peers could have been done consultatively, engaging shareholders as well. “None of the investee banks had an opportunity to do due diligence on YES Bank and I don’t think some of these banks would have participated in the capital-raising process if left to themselves,” he explains.

Experts say such decisions are detrimental to shareholders’ interest and at a time when banking stocks are at the forefront of the market correction, they could further weaken sentiments. Stocks of these lenders were down between 5.9 per cent and 11 per cent on Monday.