Fresh blows, disappointments to investors of crisis-hit YES Bank

Auditors cast doubts on bank's ability to remain a going concern, investors holding more than 100 shares barred from selling stock

It was an unprecedented weekend, filled with many disappointments, for investors of YES Bank.

As the first blow to shareholders, both retail and institutional, the reconstruction scheme has imposed a three-year lock-in for 75 per cent of shares held by all those with more than 100 shares.

The second blow crushed the hopes of additional tier-1 (AT-1) bondholders, whose exposure to YES Bank was Rs 8,415 crore. The bank’s administrator indicated these instruments had been fully written down and were extinguished.

The bondholders were confident these would be converted into shares even if they should take an 80 per cent haircut. 

While the matter is being litigated, the AT-1 bonds, meanwhile, become valueless.

The biggest blow came in the form of its disastrous December quarter (Q3) results. While the net loss of Rs 18,564 crore on the back of the Rs 24,766 crore provisioning cost was something investors saw coming, the magnitude of these numbers took them by surprise. 

It doesn’t stop at that. Deposits have shrunk by 21 per cent since Q2 to Rs 1.65 trillion, hinting at a likely run-down. While on expected lines the loan book has reduced to Rs 1.86 trillion, down 17 per cent sequentially.

The worst, though, is the subsequent impairment to its capital position. Common equity tier-1 (CET-1) fell to 0.6 per cent in Q3, way below the statutory mark of 7.375 per cent, while Rs 86 crore of penalty was levied in Q3 for breaching the minimum statutory liquidity ratio and liquidity coverage ratio.

“These conditions, along with other matters as stated in the said note, indicate that a material uncertainty exists and it may cast significant doubts on the bank’s ability to continue as a going concern,” stated the bank’s auditors in their Q3 report.

These numbers are even worse than Lakshmi Vilas Bank’s, another small-sized, capital-starved bank. 

Save for State Bank of India (SBI) and a clutch of private lenders agreeing to infuse Rs 10,000 crore into the reconstructed bank, bringing the CET-1 and capital adequacy ratio numbers to 7.6 per cent and 13.6 per cent, respectively, would have been next to impossible.

While Rs 29,594 crore of provisioning or Rs 40,709 crore of gross non-performing assets (NPA), including gross slippages (loans turned bad) of Rs 24,587 crore, isn’t a small number, analysts say it might not entirely capture the extent of asset quality mess in the bank. Brokerages such as UBS, JP Morgan, and Macquarie were factoring in Rs 60,000 crore of stressed loans, while YES Bank itself in the past had classified Rs 30,000 crore as stressed. To that extent, Rs 40,709 crore of NPAs in Q3 seems a smaller number. 

“Perhaps the capital constraint was a barrier to recognise the full extent of pain,” said an analyst with a foreign brokerage. While the provisioning coverage ratio improved from 43.1 per cent in Q2 to 72.7 per cent in Q3, analysts were expecting a higher number. “To that extent, investors need to brace themselves for another round of capital infusion, elevated NPAs and probable losses,” the analyst added. 

“The bank will need further capital infusion to grow, strip off assets to release capital and mop liquidity to meet liabilities,” analysts at Emkay Global Financial noted.

The auditors also said the assumption of YES Bank being a going concern was dependent on the degree of success of the final reconstruction scheme, the amount of capital infused into it, and its ability to stabilise deposit balances after withdrawal of the moratorium. 

For investors, while the fresh infusion of capital is positive for now, the Q3 results have added to their woes. What the bank would do to prevent a further meltdown in deposits and lower costs, whether after the Q3 clean-up it remains attractive to foreign investors for another round of capital raise, and how the new management revives YES Bank’s business are some unanswered questions.