YES Bank FPO: Don't judge it on the basis of price discount alone

NPA-adjusted valuations are not attractive; asset quality is a concern

YES Bank’s shares tumbled over 13 per cent on Monday upon the lender’s Friday announcement of a Rs 12-13 per share price band for its Rs 15,000-crore follow-on public offer (FPO). The price for the FPO, which opens on July 15 and closes on July 17, indicates a hefty 41-46 per cent discount over its current price of Rs 22.10. 

Though the discount suggests some potential short-term gains, concerns over YES Bank’s asset quality — which may worsen due to Covid-19-triggered disruptions — offer little comfort, say analysts.

According to Deepak Jasani, head of research-retail at HDFC Securities, “YES Bank’s FPO pricing optically seems attractive, given the difference in the price band and its current market price (which may fall after free-floating stock increases). Investors may want to make some money in the short term, though it may not be assured due to risks in the overall market.” The majority of the bank’s shareholding (over 78 per cent) held by State Bank of India, HDFC, ICICI Bank, Axis Bank, etc, is under lock-in until March 2023. Jasani says YES Bank’s asset quality, mainly in the wholesale book, and its continued need for capital remain a concern.

On the FPO being priced at a huge discount, Prashant Kumar, managing director and chief executive officer at YES Bank, said the FPO price has been decided on the basis of the assessment of market demand for the equity shares offered through the book building process and after taking into account the feedback from BRLMs (book-running lead managers) and according to the qualitative and quantitative basis of offer price disclosed in the red herring prospectus and the price band advertisement.

A painful past

After growing well for several years, YES Bank has seen tough times in the past couple of years in terms of asset quality, including NPA divergence, and change in management, which affected its financials, leading to a net loss of Rs 16,418 crore in FY20 and its capital adequacy ratio falling below regulatory requirement. Annually, between FY18 and FY20, advances have shrunk 8 per cent and deposit base 28 per cent.

Consequently, in March 2020, the government notified a reconstruction scheme, which was followed by the reconstitution of its board and Rs 10,000-crore equity infusion by larger peers, led by State Bank of India. YES Bank also wrote off its additional tier-II bonds, a move contested by investors.

No respite yet

 

 

The latest move to start afresh is positive, but analysts are cautious. “We’re worried about YES Bank’s asset quality as the entire banking and non-banking financial space is feeling the brunt of Covid-19 crisis,” says an analyst.

With the economy expected to contract 5 per cent in FY21, analysts are sceptical of YES Bank’s 15 per cent-plus exposure to severely affected sectors, such as real estate, hospitality, travel, and tourism, and to some extent retail. As much as 35-45 per cent of its corporate and MSME (micro, small and medium enterprises) book was under moratorium as of April. Once the moratorium is lifted, some of it may turn bad. Even after high provisioning, FY20 ended with the net NPA ratio of over 5 per cent.

Some experts say the bank may fall short of growth capital, even after the FPO. Its total stressed book as of FY20 may not leave significant capital to grow. According to ICRA’s recent rating downgrade report on YES Bank, there is a likelihood of high credit costs owing to the weak operating environment, coupled with high overdue advances (SMA, or special mention accounts), which stood at 7 per cent of standard advances as of March 31. But, according to Kumar, “The post-FPO capital would also take care of our growth for at least two years.”

Among positives, the share of corporate loans is down to 56 per cent in FY20, from 66 per cent a year ago; the management aims to bring it down to 40 per cent. Some reduction in the moratorium book and improvement in retail deposits have been seen since April.
 

Is pricing really cheap?

On a reported basis, the FPO is priced below its FY20 book value, and the discount to current price seems to partly capture future pain. But, on an adjusted basis (book value minus net NPAs), the FPO is priced at above 1x. Sanjiv Bhasin, director at IIFL, says: “It is a fair opportunity for medium-term investors as the FPO would largely address its capital concern.”

Not all experts are convinced. “At a time when strong and growing banks are available at attractive valuations, putting money in YES Bank makes little sense,” says an analyst.
 

For existing investors, experts say selling part of their shareholding at current price and re-entering via FPO may lower acquisition cost.