Will RBI be YES Bank's white knight?
With a decline in YES Bank's income and the risk of rising NPAs, the RBI may soon have to facilitate a merger or acquisition Moody's downgraded YES Bank's longterm foreign currency issuer rating from "Ba3" to speculative grade "Ba1" on August 28, 2019, indicating that its debt issuance carries significant credit risk. On August 31, 2019, India Ratings downgraded YES Bank from "Ind AA-" to Ind "A+". The bank's shareholders have lost 84 per cent in share value year-on-year (its share price plunged to ?59.45 on September 4, 2019 from ?366 on August 29, 2018).
This downward spiral in share price is disconcerting to investors and is attributed to rising defaults and speculative loans on its advance book; reported defaults are ?29,960 crore, 1.99 times their present market net worth (YES Bank's full market cap is ?,995 crore as on September 4, 2019). Total defaults are 2.77 times their present market net worth, while the reported GNPA is 0.8 times the net worth.
Default risk
Chart 1 displays the reported and likely defaults which will bring the bank's NPA level to over 17.5 per cent of its reported advances, worth ?2,36,300 crore as on June 30, 2019. The top 5 borrowers account for 54 per cent of these total defaults. Most of YES Bank's borrowers have pledged promoter
shares as a collateral to not only with YES Bank alone, but also with multiple lenders and mutual fund houses (i.e. 20-100 per cent of promoter-pledged shares as a percentage of total promoter shares).
Generally, this is fine, but can prove to be a risky scenario if the other lenders liquidate their collateral and cause the borrower shares to plummet, resulting in a significant decrease in collateral value. In such a scenario, a borrower might not be able to bring in additional collateral of promoter shares to YES Bank as a buffer, increasing the possibility of default and thus leading to increased NPA.
Given the total default, let us consider YES Bank's financial metrics ( Chart 2). Between March 2018 and June 2019, YES Bank's Capital Adequacy Ratio (CAR) has dropped 270 basis points. To shore up its CAR, the bank has raised capital worth ?1,930 crore via a Qualified Institutional Placement (QIP) - which seems a temporary and one-time infusion of capital that might moderately improve the bank's reported Common Equity Tier 1 (CET1) ratio to 8.6 per cent from 8.0 per cent as on June 30, 2019 (RBI norm is 7.375 per cent) - but will be hugely insufficient to cover the probable defaults.
The last two quarters have witnessed a steady decline in the net interest income, and a net loss was reported in March 2019 due to the increasing provisions; a trend likely to continue in the near term due to probable defaults. With signs of YES Bank's CET1 steadily on the decline, limited ability to raise capital and rising NPAs, it will not be long before the bank comes under RBI's Prompt Corrective Action netwrok - NPA crosses 10 per cent of advances, CAR drops below 9 per cent, and the bank incurs a net loss in subsequent quarters. The RBI will eventually restrict YES bank's lending and depositaccepting capabilities, seeking a suitable partner for a merger or takeover.
Potential options
With this possible scenario, one is reminded of Global Trust Bank (GTB). GTB had advances worth ?3,276 crore and deposits worth ?6,920 crore. The Ketan Parekh incident left GTB with a GNPA of ?1,100 crore, ie 33.78 per cent of advances. An RBI inspection found that GTB's net worth was negative, and then began a six-month search for a suitor, with Oriental Bank of Commerce becoming the finalised acquirer. YES Bank has advances approximately 72 times that of GTB, GNPAs more than 10 times than that of GTBand total defaults 37.78 times of GTB's GNPA.
So, in the current climate , the question is who will merge with or take over YES Bank, given the fragile state of the Indian financial system and the mega bank mergers announced on August 31, 2019? The probable list of acquirer candidates has shrunk, and like GTB, does YES Bank have the leisure of time to wait for six months to search for an acquirer?
The regulator is left with very limited options and might force the largest private or public sector bank to acquire YES Bank. But before this, the question that broadly looms is: "Will RBI become YES Bank's knight in shining armour or will it let it wilt into its doom?"