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The Yes Bank Rescue: Banks Chip in, Shareholders Locked

Yes-Bank-Rescue.jpg

The Yes Bank Saga takes another step forward, with Indian public and private sector banks taking on 80% of the equity and attempting to revive the bank. Here’s a few salient points:

Banks to Add 10,000 cr. Capital

A number of banks will add capital to Yes bank, which will result in the following structure:

Yes Bank New Holding

This is an addition of Rs. 10,000 cr. to the bank’s balance sheet for now.

Additional Tier 1 Bonds Go To Zero. Bank To Make 8400 cr. profit

Separately, the bank will write down completely, the Additional Tier 1 (AT1) bonds issued earlier.

AT1 Written Down

We will write below on AT1 bonds, but these bonds are allowed to be written down if the RBI goes into resolution in a bank.

Note however that:

  • Basel III compliant AT1 bonds have been written down
  • The Additional Tier 2 bonds are safe. So are any non-compliant bonds, or Basel II tier 1 bonds, or such. (One of these was to have an interest payment on March 5, which was stopped because of the moratorium)
  • AT1 bondholders may have to go to court, but the language on the bond itself provides for such a write down.

This gives Yes Bank Rs. 8,415 cr. profit. Why? Because when you write off a loan that you need to repay, it’s profit for you. Effectively it’s like the other party giving you this money free of cost. AT1 bonds are like that – when the bank writes them off, bond holders get nothing at all – so it’s a profit for the bank.

That profit will add to the bank’s capital reserves and give it more health. The above two measures – new capital plus AT1 write down – will add Rs. 18,415 cr. to the bank’s equity.

Shareholders locked in for 3 years (75%)

All current shareholders as of Friday (holding more than 100 shares) are locked in for another three years with 75% of their holding. If you held 1,000 shares, you can only sell 250.

This creates problems for index funds (Yes bank is in the Nifty and shares will have to be held for three years). Also, for retail holders who have sold on Friday (since the shares may not have left their account). And then, for any intermediate holders like the clearing corporation etc.

Remember that some 5.9 cr. shares were traded as “deliverable” on Friday.  Many of these cannot be delivered, and the brokers/retail/clearing corporations may have these shares in their accounts – and this will cause some sort of delivery situation for the settlement on Monday. Let’s see how that evolves.

Also, there’s no clarity on what happens to people who have borrowed Yes Bank shares and shorted them. They may not be able to deliver.

Depositors safe, Moratorium to end Wednesday 18 March 2020, 6pm

You couldn’t withdraw deposits more than Rs. 50,000 till now. This will be lifted as a restriction, from March 18, 6pm. After that you can withdraw to your heart’s content.

Many of you will ask if you should withdraw, even though so much more capital is available. The only correct answer is: do what your heart tells you to do. There’s no point creating panic, because the RBI will stand behind the bank depositors and ensure that anyone withdrawing will get what they want.

Massive Losses, Taken Upfront, Have Beaten up Capital

Results were announced yesterday too. It was horrible:

  • Loss of 24,000 cr. pre-tax (18,500 cr. after tax)
  • Operating losses of Rs. 6 cr. (usually banks have big operating profits and then it goes down with provisions)
  • Shareholder funds have dropped to Rs. 9,000 cr. (CET 1 ratio of 0.6%, but this is strange)
  • Deposits dropped by over 40,000 cr! (From 209K cr. to 165K cr)
  • Asset side: Advances dropped 38,000 cr. (now 186,000 cr.) and investments have fallen by Rs. 6,000 cr. (now 61K cr)
  • 24,000 cr. NPA recognized in the quarter, and gross NPA is upto 18%.
  • Net NPA (after provisions of 24,000 cr. additional) is about 6%

With the new capital and the writedown of AT1, the capital will go back up to 7.6% (around 25,000 cr. of shareholder funds)

The percentages don’t seem to make sense. Because 0.6% of roughly 250,000 cr. of assets is like Rs. 1,500 cr.! And Yes bank has 9,000 cr. in assets. But some assets (like deferred tax assets) will not qualify for Tier 1 capital.

Anyhow, what this means is that Common Equity Tier 1 Capital will go back to 7.8% after the capital infusion. These are horrible results.

Is There Value in the Bank? For Shareholders?

After the moratorium, some deposits will leave, but let’s assume for a moment that the bank is able to retain enough depositors. Then, what’s the value look like?

  • They will probably collect more on assets (loans) and sell collateral to get back what they can. This will involve write backs on the NPAs to some extent.
  • That will probably be balanced by new NPAs that will emerge, undoubtedly, because new NPAs always emerge
  • Then, assuming the current net NPAs of 11,000 cr. go to zero, the capital will fall to around 14,000 cr.
  • Capital ratios will still be okay at this point, though the bank would have shrunk
  • A rough estimate of book value is Rs. 11.5 per share after the NPAs are written down
    • Rs. 25,000 cr. in capital after infusion and AT1
    • Rs. 11,000 cr. written down
    • Spread over 1,255 cr. shares
    • = Rs. 11.5 per share
  • Such a bank will trade at a discount to the book value because there is no growth for a while, so the shareholders should not expect the price to be higher.

But the important thing is: the number of available shares to sell in the market will be very low. For people who are short, this could be a major problem as borrowing will be difficult, and buying in the market will push up the price. Plus a settlement failure will create a demand in subsequent auctions. So we could easily see a situation where prices can be very volatile on the upside for at least a few days.

(Any upside jump is good because it will allow the investing banks to quickly recoup part of their investment if they choose to sell upto 25% of what they invest, which they should)

Too many things are happening. Let’s see where the situation goes. Overall, this is a step in the right direction – a rescue in which both Public Sector Banks and Private Sector Banks have participated. AT1 bond holders will hate the write down and if they have been missold the bonds, they should go to the ombudsman or to consumer court. In general, the Yes Bank Rescue can still impact banking system sentiment and the bank might still go further down. But hopefully if it does recover, so will sentiment about banks and we can slowly trudge back to normal over the next year or so.

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