YES Bank fiasco, double-blow for Max Financial; analysts caution investors

Max Life has Rs 2,000 crore exposure to YES Bank's tier-2 bonds and the latter accounts for 11 per cent of its bancassurance channel

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 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 (read: YES Bank’s fiasco) has made the deal seem important more than before.

Max Financial is tangled with YES Bank in two ways. As a direct hit to its business, YES Bank generated for 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 have to wait for March month’s 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 for Rs 2,000 crore of exposure the company’s life insurance arm has in YES Bank’s tier-2 bonds.

While Rs 1,000 crore is parked in Max Life’s shareholders’ account, Rs 500 crore forms part of its participating funds and another Rs 500 crore in its unit-linked insurance plan (ULIP), which as per the company, is vulnerable to a write-down as these are categorised as investments held-to-maturity. Unless there is a default in the coupon payment and credit rating is downgraded to default rating (D), Max Life need not take 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 new business, generated through YES Bank. “Risk to persistency of the back (investment) book from YES Bank is there,” analysts at Sharekhan add.

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

With so many overhangs for Max Financial, the Street is unanimously 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 due to the recent developments.

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