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Opinion

Yes Bank Deposits are Safe: SBI To Take 49% Equity

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The Yes Bank Saga reached a partial resolution on Friday after a moratorium was set up on Thursday, when depositors could only withdraw Rs. 50,000 from their accounts. That moratorium remains, but a draft resolution plan is in. Here’s the salient points.

First, no depositor will lose money. Current account, savings or FDs. They’ll get all money back when the moratorium is lifted.

Second, SBI will buy in shares at Rs.10 each and own 49% of the bank. Taking current share count of 255 cr. shares, they’ll need to put in Rs. 2,500 cr. to get there. They can invest more too upto around 21000 cr. more if they want, but to do that they’ll need another partner, because they can’t go above 49%.

(They also have to keep minimum of 26% for three years)

So the dilution for existing shareholders is at least 50%.

Third, the only thing that takes a hit is Tier 1 Basel III bonds. These are instruments that behave like equity and have strange clauses, like the bank can refuse to pay principal or interest when it likes (and RBI wants). One clause in the bonds allows the bank to force “loss absorption”, meaning the bank could deny paying the interest or write down the principal slowly over time.

We’ll have a separate post on that. But “Additional” Tier 1 bonds are like this: The bank has to have capital against the loans it lends. The bank can raise equity by selling shares. But that dilutes everyone if you have to constantly do that. So, there are other “quasi equity” things you can issue, under Basel III regulations. One of them is something called a perpetual debt instrument (“Perpetual AT1 bond”). Such bonds have structures like this:

  • It will not have a maturity date (“Perpetual”)
  • The bank can choose to call it back after 10 years by paying back principal and interest
  • The investor cannot force the bank to call it back, no matter what
  • On a trigger event like profits not being enough, the bank can refuse to pay interest for any year
  • On a trigger like capital ratios falling too low, the bank along with RBI can lower the principal amount on the bond without the investor having any say, all the way to zero.

This then becomes as good as equity for the purpose of capital adequacy since the bank can choose to not pay back any money or interest. But what’s in it for the investor? A slightly higher interest rate. Yes bank perpetual AT1 bonds were trading at 10% or so. Which attracted a lot of investors, including mutual funds, insurance companies and even NBFCs.

Now, given the situation, Yes Bank needs to be resolved, so the AT1 bonds have been cut to zero.

This means if you own an AT1 bond, you will get nothing. That’s fair, in the context of it being part of the agreement. There will be nuances of course, and we’ll discuss that separately.

What happens now?

This is a good starting point. Writing off AT1 gives the bank roughly 10,000 cr. in capital. We believe SBI may have to put in between 5,000 to 10,000 cr. more. There may be other investors too.

There will be massive withdrawals after the moratorium is lifted. Why? Because the new bank is not SBI itself – it’s only owned by SBI. Everyone who has been inconvenienced will remember and try to get their money out as quickly as possible. This is natural, but the onus is on SBI to try and stop this.

To stop this in any meaningful way, the idea will have to be to raise a LOT of money and get an RBI backstop to pay back deposit holders. The last option is to actually merge Yes Bank with SBI. Or have the bank guarantee all deposits at Yes Bank. Otherwise the bank will just bleed deposits. The bleeding will have to be allowed – you can’t stop deposits from leaving, especially after you have supposedly rescued them. Yes Bank has valuable pieces – it’s a good API provider to fintech startups for banking based APIs and has a decent team looking at their technology. There’s also the retail franchise but  is losing attractiveness by the day, unless they stem the rot.

Looking at numbers, the rough estimates are that RBI will have to provide liquidity for this, and there needs to be a capital infusion. The AT1 bond write off adds over 10,000 cr. to the net worth of Yes Bank. SBI will add about 2,500 to 5,000 cr. We hope that this will help them raise equity from other players who have shown interest till now – hopefully there will be investors within the next week who show confidence.

This will be important to the banking system as a whole. If such a rescue does not work, and the bank has to actually be merged with SBI, it throws into question the concept of ever using moratoriums at all. Doing that is effectively like killing a bank, and it should simply not be done in future cases.

More importantly, there are implications for :

  • Shareholders: I still expect heavy dilution and the stock price will easily fall to much much lower levels than the Rs. 10 that SBI will buy.
  • Deposit and account holders: No impact but given the dynamics it may take a while before they get all their money out. I hope the bank lets ANYONE exit. But it looks like deposits and account balances are safe.
  • Bondholders: Tier 2 or other bonds are safe. Only Additional Tier 1 holders lose 100% of their money. But hopefully this may see a better resolution going forward.

More will come on this topic.