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Are Yes Bank Deposits Safe? Will The Stock Price Recover?

Yes-bank.jpg

Yes Bank – The “Kohinoor” of Rana Kapoor has seen him exit in an unglamorous way. He had pledged the stock in favour of his daughters’ borrowings, and the lenders decided to selll. The stock fell 25% in a day, and hit a 10 year low at Rs 30.

Seeing the stock tumble from its high of 400, it might have looked as an attractive buy at some point for many of us. A comment in the Capitalmind Slack community rightly said, Yes Bank looked attractive at 120, 100, 80, 60 ,40 and at 30 as well. We don’t want to touch the stock unless we have some strong conviction, even if a stock has fallen 90%.

The management at Yes Bank scheduled a conference call to address the divergence between Yes banks fundamentals and its share price. Even with that, a few questions continue to be asked:

  • Are the depositor’s money safe?
  • How can the bank revive itself?
  • Can the Bank raise capital at current prices?
  • Is the Bank going to Merge with someone else?
  • Top Management Selling a Concern?

We will try to address each of the above one by one.

Are Deposits Money Safe at Yes Bank?

The most pertinent question for a Yes bank customer can be “Is My Deposit Safe ?”.

We will try to answer this question first. If everything goes to hell, will I get my money back? Does Yes Bank have the ability to pay back?

According to the latest press release by Yes Bank, its gross advances stood at Rs 2.32 lakh Crs and deposits at Rs 2.09 lakh Crs.

If all depositors want their money back, that means Mr. Yes Bank needs to find Rs. 209,000 crores to pay people back their money. Remember some of this money is actually held against loans as collateral so that much needn’t be paid (it will only cancel out the loan). But for argument’s sake, assume all of it needs to be paid back.

So what kind of liquidity does Yes bank have?

Now:

  • Yes bank has Cash and balance with RBI was at Rs 10,800 Crs as of March 2019
  • Balances with bank and money at short notice is at RS 16,200 Crs as of March 2019.
  • That’s like cash of Rs. 27,000 cr.

Yes Bank balance sheet 2019

  • Yes Bank has a investments of Rs 76,500 Crs as of June 30 2019 (Q1FY20 presentation).
  • In the Basel III Disclosure, the bank speaks of High Quality Liquid Assets of 58,900 cr. – this will include whatever is carved out from the holding of government securities (roughly 80% to 90% is allowed to be used for the HQLA definition). There will be another 3% of deposits still available outside of this, which is another 6,000 cr..
  • In total, government bond and other holdings will add up to Rs. 65,000 cr.
  • We could add the CRR stored with RBI, that will provide another 10,000 cr.
  • That’s a total cash and liquid asset base of around Rs. 75,000 cr.

That means they have 75,000 cr. . in Cash+Liquid investments to pay back deposits. This amounts to 36% of all deposits.

Note: Yes bank also has borrowings of 108,000 cr. These don’t need to be paid back on demand, most of the time, because some are Tier II and Perpetual bonds (which can’t be called by the lenders) and some are refinance loans or infra bonds which generally are linked to the assets underlying them and don’t get called.

Now they’ll need to get more money – Rs. 125,000 cr. from the loan side of the book in case they have to redeem all deposits  (govt. bonds and cash account for the remaining 75,000 cr.)

On the assets side, they also have loans of Rs 2.32 lakh Crs. and investments of Rs. 76,000 cr.

  • There are some known problems – like 10,000 cr. of problem loans and about 29000 cr. of loans rated BB or below.

Update: This includes about 10,000 cr. of NPAs and 29,000 cr. of loans rated BB or below.

Assume that we could sell the entire portfolio at a 25% haircut, the portfolio will yield 174,000 cr. – enough to pay back the full deposits if its demanded.

Effectively,

  • Yes bank has liquidity of 36% of all deposits available immediately
  • The rest of the 64% of deposits can be obtained through selling loans (Yes bank owns nearly double that much in loans)

So in our view, your deposits are safe.

In fact, RBI will be monitoring this regularly and will provide liquidity. In today’s post meeting, RBI mentioned that the system is safe – and a bank the size of Yes bank is not likely to see depositor money getting hit.

How Can The Bank Get Back Up?

Yes bank has a problem with capital, if it gets more NPAs.

It has a capital base of around 28,000 cr. (It raised about 1,900 cr. recently) and total Tier 1 capital of 35,000 cr. or so.

Every loss they take will cut into the capital. So if there is a loss of 5,000 cr. of loans, their capital will fall to 30,000 cr.

RBI requires about 8% Equity Tier 1 Capital. That is about 20,000 cr. or so. They will have to lose about 8,000 cr. in total to hit the RBI limit. (Update: Changed figures slightly. This is  by March 2020, as Yes bank has clarified, but that’s not too far away)

Remember also that such losses are not taken in full immediately. They take two years to be provisioned completely. That means the bank gets about 2 years of time – eight quarters.

The bank currently generates an operating profit of Rs. 2,000 cr. a quarter. Assuming that falls by 25% also, in eight quarters, the bank will generate 12,000 cr. of operating profits. Which means the deficit – to get to RBI standards of Tier 1 capital – will be only Rs. 3,000 cr.

At some point, the bank will need to raise between Rs. 3,000 to Rs. 6,000 cr. to meet capital requirements, if they lose 15,000 cr. more in bad loans.

Is Raising Capital a Issue?

The problem isn’t raising capital per se. It’s about the price of the share!

Yes bank is worth only Rs. 10,000 cr. in market cap.

Even if they find two institutions to fund Rs. 3,000 cr. today, at today’s price, the buyers will end up owning more than 11% each! (Total market cap will become 13,000 cr.)

This is not allowed – no entity can own more than 5% in a bank without RBI approval. (Update: changed from 10% earlier, which was our error)

So if they raise money, they’ll have to raise at a higher price than today’s price.

According to the SEBI guideline, the issue price for a placement should be a higher close of either two week average closing price or six month average closing price. As of today Yes Banks two week average is at Rs 49 and six month average is at Rs 120! (Gotta raise at Rs. 120, the higher of the two, according to Sebi rules)

Note: this is only if you raise from more than 5 entities in a QIP. If you raise from less than 5 entities, you can use a 2 week price only.

At Rs 120 no investor would be willing as the stock is at Rs. 42 – who in his right mind will give that much premium?

Even if we believe that the correct price is below Rs. 90 – remember, the last QIP was at Rs. 90 or so – it will take around one to two months more for the average price to  drop substantially, assuming current stock prices remain stagnant. This will see more visibility as one more quarterly result will be out, and Yes bank management seem to be engaging with a number of PE investors and family offices to get investment.

Is the Bank Going To Merge With Another Bank?

Someone in the conference call rightly asked, has the question of merger ever crossed your mind and has their been any discussion with RBI? The management said there was a discussion with RBI, where RBI and Finance Ministry wants Yes Bank to work as a individual entity rather than getting merged. (This is a “he-said-she-said” kind of note, so take it with appropriate quantities of salt)

We agree that a merger might not be in cards in the near term. But when things take a turn from bad to worse, shotgun mergers are going to happen. Already, they’ve changed management. This management will be given a year or so and if things get worse, there will have to be a merger. We don’t expect depositors to lose anything. But shareholders may see a big hit if there is such a merger.

We saw a GTB merge with OBC. We saw a Centurion bank merge with a Bank of Punjab and then all of that into HDFC. LVB is on the block for a merger. Public sector banks have formed four blocks with mergers galore. India isn’t new to mergers.

Even in case of DHFL things post October 2018 , DHFL was paying interest on its bonds until July 2019. DHFL was always looking at selling its loan book and stake in subsidiaries to raise cash. At the current juncture things look very dire, promoters are willing to sell their stake.

Top Management Selling a Concern?

Rana Kapoor’s pledged shares were sold by the Reliance mutual fund and the stock has lost nearly 90% of its value. We can somehow agree it was beyond Rana Kapoor’s control to hold back the selling of shares (he could have managed not to sell them). The selling by other top management of Yes bank simultaneously is thing to worry about. Since last quarter the following individuals who hold top positions at Yes Bank sold their stake.

  • Rajat Monga (CFO)
  • Manish Vora (Sr President)
  • Amit Surekha (Group President)
  • Ashish Agarwal (Sr Group President)
  • Arun Agarwal (Sr Group President)
  • Sumit Gupta (Sr Group President)
  • Subramanian Ayyar (National Head of Rural and Inclusive Banking)
  • Puneet Nagpal (National Credit Manager)
  • Gopinath Koneti (Vice President and Head South India)

In yesterday’s concall, management dismissed any concerns of insider selling. They cited in most cases the above individuals have taken leverage to exercise their ESOPs and had to pay them back. They had to sell the shares to deleverage. In some cases, shares were sold due to personal commitments.

Leveraging for exercising ESOPs, or pledging the exercised shares is a common phenomenon. But selling by all of them in a same period of time and that too when the stock has lost almost its 80-90% of its value feels strange. If the underlying value of pledged shares has gone down by 80% then what were the holders of pledged share doing? The pledged shares would have revoked when the stock would have fallen by 50%. Selling the shares when stock has lost most of its 80-90% is bit out of box.

To add more, Rajat Monga who was the CFO of Yes Bank and Rana Kapoors Go-to man has suddenly resigned post selling his shares, citing ill health. Is there something in the books that warrants concern? We need to wait and watch, but there is a small fear when insiders also sell alongside a distress sale of pledged holdings by Rana Kapoor.

What’s the Verdict?

There’s no one answer. Things change everyday, on every bit of news.

First, about the stock. When we wrote a post long back we thought the stock would be attractive below Rs. 90. (Hey, even big institutions bought in the QIP at Rs. 90)

But as new data comes in, the stock remains iffy. The basic thing to see is:

  • How much capital will the bank have after dilution and after taking the NPA losses? Our best guess (with a worst case estimate) is Rs. 15,000 cr. in two years.
  • For a bank with a book value of Rs. 15,000 cr. you might only pay 1x book for all this mess, which is around 50% higher than current. That is assuming there are no more surprises.
  • That sounds like a big deal, but if there’s a problem, the bank will be merged and shareholders will get nothing. So there’s 100% risk on the downside.
  • Given that, the price is a bit of a lottery. But the odds are not great – 100% if lose, 50% if I win? We would like better odds than that.

Second, about deposits. We think the deposits are safe, even if the bank sees a massive exit of all its depositors. Beyond the financials, there is also the RBI which is quite vocal that the system is safe, and has taken action in the past to ensure depositors don’t lose money.

We’ll see more data as it develops. Let’s just hope there’s no more surprises.

Update from Yes Bank:

Yes bank has replied to the above with some clarifications:

Statement 1 – There are some known problems – like 10,000 cr. of problem loans and about 29000 cr. of loans rated BB or below.

Fact 1 – Please note that in Q4FY19, the Bank had created a watchlist of Rs 10,000 crores wherein the Bank had identified certain performing accounts which have been faced with stress due to current market and liquidity condition. The Bank has created Contingency Provision of Rs 2,100 crores towards these identified accounts. Subsequently, in Q1FY20, the Bank disclosed the BB and Below Book of Rs 29,470 crores which also includes the watchlist which was created in Q4FY19 ie Rs 10,000 crores of watch list is part of the BB and Below book.

Our view: Our post hasn’t considered the watchlist at all. We considered the Gross NPA (of Rs. 12,000 cr. but we just used a lower number as an approximation) as the bad loans, and the 29,000 cr. number mentioned as BB and below in the investor presentation.  

Statement 2 – It raised about 1,500 cr. Recently

Fact 2 – The Bank raised Rs 1,930 crores recently through the QIP route

Our view: We approximated – and have corrected. 

Statement 3 – RBI requires about 8% Tier 1 Capital.

Fact 3 – The RBI requires minimum CET1 ratio of 8% by March 2020

Our view: We approximated – and have corrected. 

Statement 4  – This is not allowed – no entity can own more than 10% in a bank.

Fact 4 – The RBI can allow an entity to own greater than 5% in an entity subject to RBI approval

Our view: We have corrected this – and we understand getting RBI approval is a long process, and isn’t deterministic in time. 

Statement 5 – So if they raise money, they’ll have to raise at a higher price than today’s price. According to the SEBI guideline, the issue price for a placement should be a higher close of either two week average closing price or six month average closing price. As of today Yes Banks two week average is at Rs 49 and six month average is at Rs 120! (Gotta raise at Rs. 120, the higher of the two, according to Sebi rules). At Rs 120 no investor would be willing as the stock is at Rs. 42 – who in his right mind will give that much premium?

Fact 5 – As per Chapter V of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 , a preferential issue of specified securities to qualified institutional buyers, not exceeding five in number, shall be made at a price not less than the average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the two weeks preceding the relevant date.

Our view: This is only if you have five or less investors. For a large fund raise, it’s likely Yes bank will need more, and even the recent QIP involved more than 5 investors. 

Statement 6 – How much capital will the bank have after dilution and after taking the NPA losses? Our best guess is Rs. 15,000 cr. in two years.

Fact 6 – The Bank’s current capital is Rs 28,000 crores. The Board has authorised Ravneet Gill, MD&CEO to deal with private equity investors to raise further capital post the QIP raise of Rs 1,930 crores. We fail to understand how the author has arrived at the capital post dilution and after NPA losses of Rs 15,000 crores.

Our view: Yes bank has about 28,000 cr. in capital – and about 6800 cr. of Net NPA.  We presume a further hit of around 10% of assets – about 23,000 cr. in two years. Adjust to this operating profits of 10,000 to 11,000 cr. in two years, and the rough guess is around 15,000 cr. Of course, we haven’t included future fund raises (they will strengthen your position but we don’t know about dilution there) and major recoveries. This is a moving target and we’ll know more as results come in – we are making assumptions here. Note: We have updated this to our “worst case estimate”.