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The 15,000 cr. Yes Bank FPO: Should You Invest?

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Yes bank is doing a Follow On Public Offering (FPO) to raise Rs 15,000 Crs. The price band for the FPO is Rs 12-13 bid in multiple of 1,000 shares. Yes Bank needs to raise capital to account for all the provisions it has to take on the books.

Anchor Investors put 1/3rd in

Yes bank has allotted 341 Cr shares worth around Rs 4,098 Cr to anchor investors. The allotment price was at Rs 12 a piece.  Mumbai based Bay Tree India Holding was the biggest anchor investor with Rs 2,250 Cr, followed by HDFC life insurance (Rs 400 Crs), Amansa Holdings (Rs 373 Crs), Elara India Fund (372 Crs). There are players missing from the initial rescue round: RBL Bank and Edelweiss, also in this round.

How does this FPO Help?

According to the RBI guideline of 2019, banks are required to maintain a minimum Tier 1 equity of 8% and Capital adequacy ratio of 10.5%. Currently Yes Bank has a Tier 1 capital of 6.5% and CAR of 8.5%. Both the metrics are way below the RBI guidelines.

They have roughly 215,000 cr. of loans, and a Tier 1 capital base of around Rs. 15,000 cr. Adding another 15,000 cr. effectively doubles their capital to Rs. 30,000 cr.

With an additional Rs 15,000 Crs, The CET 1 ratio changes to 12.75% and  CAR to 14.75%.

Now the bank has around 33,000 cr. of gross bad loans, and still, around 8,600 cr. in net loans (after provisions). They are likely to see a lot more of these turn bad, plus new ones, after the moratorium, so having additional capital is useful. (They are likely to need the capital so they can increase provisions)

How Much Is The Dilution?

Total number of shares issued at the end of March 2020 is roughly 1,255 Cr shares. The FPS is currently for Rs 15,000 Cr at Rs 12 each. The FPO if fully subscribed will add another 1,250 Cr shares. Effectively the dilution is roughly 50%.

For instance SBI owns roughly 605 Cr shares in Yes Bank. At current juncture SBI has got approval to only invest a maximum of Rs 1,760 Crs worth (147 Cr shares). This will bring down the shareholding of SBI from 48.21% currently to about 30% post issue.

Some Other Banks Have Sold Shares.

Quite a few banks participated in the Rs. 10,000 cr. rescue of Yes Bank. (Read post)

The reconstruction scheme locked in 75% of all the investment for three years. The rest of the shares were free to be sold. The allotment of shares happened on 17th March 2020.

If we compare 17th March 2020 and 30th March 2020 shareholding pattern of Yes Bank, banks like Federal bank, IDFC First bank and Kotak Mahindra Bank have sold roughly 14.6 Cr shares in 13 days.

The 15,000 cr. Yes Bank FPO: Should You Invest?

Interestingly the share price of Yes Bank subsequently dropped to Rs 22 by the end of March 31st 2020.

The 15,000 cr. Yes Bank FPO: Should You Invest?

Assuming most of selling happened between March 18th March 26th, the weighted average selling price for these days is roughly around Rs 45. Let’s assume Rs. 30 as their sell price. Now this means the banks which have sold made roughly Rs 20 per share profit.

This is pretty good. The banks have done nothing wrong here. Just by selling a part of holding at 3X the buy price, Federal Bank recovered 88% of investment, IDFC First 72% and Kotak Mahindra 43% of its investment in Yes Bank. Kotak still had a considerable quantity of shares that it could still sell.

This FPO will add Liquidity

Currently, 75% of all Yes Bank Shares were locked, so the “free float” shares are only about 300 cr. shares. Which isn’t that much, plus, remember that SBI isn’t selling even a single share (and it has 151 cr. shares!). Basically the total shares available to trade in the market are considerably small, less than 100 cr. shares.

After the FPO, the number of tradeable shares will increase by 1250 cr. shares.

Effectively, the tradeable shares of Yes Bank Will increase over 4x after the FPO. Click To Tweet

All banks put together have roughly 330 Cr “unlocked” shares at the end of March 31st2020.

The 15,000 cr. Yes Bank FPO: Should You Invest?

  • Currently Yes Bank Shares are trading at Rs 19.
  • What if the banks sell their unlocked shares at Rs 19 and then buy back the same in FPO for Rs 12?
  • This will give them Rs 7 profit on each share keeping their holding intact.
  • That’s about Rs. 2,200 cr. in profits that banks could get by just doing this round trip.

It is possible that some banks which have already done such sells in previous allotment might do the same again and book some profits. This has already been reflecting in the share price as most the volumes have spiked up and the share price is moving downwards.

If You Already Own Shares, What To Do?

It’s quite unlikely that Rs. 10,000 cr. by non-anchor investors will be subscribed. So our suggestion is to consider this:

  • Sell what you can in the market (whatever’s not “locked in”)
  • Apply for the FPO at Rs. 12.

This is assuming you want to be an investor in Yes bank. There are good reasons to reconsider that.

How do you value Yes Bank?

Banks will be valued at “price to book”. The current market cap, at Rs. 19, is a bit lower than Rs. 25,000 cr. Their “book” value is Rs. 21,000 cr.

Nerd note: Why is Tier 1 capital only Rs. 15,000 cr. and the Book value Rs.21,000 cr? There’s a bunch of deferred tax assets that the bank has, which aren’t considered in Tier 1.

Assume that the bank raises 15,000 cr. and writes off about 10,000 cr. in the next one year. That adds roughly Rs. 5,000 cr. to the book value, taking it to Rs. 26,000 cr.

You want to value this bank at a max of 1x book. Because it doesn’t grow. If it shows signs of growing, we’ll revisit, but 1x book is the limit today.

That means Rs. 26,000 cr. market value, and the new share count is roughly 2,500 shares. That’s about Rs. 10.40 per share.

Meaning: A decent value for Yes bank is Rs. 10.4, more than 10% lower than the FPO price. This doesn’t look like a smart deal.

For investors who are not into Yes Bank, What are the options?

Firstly we would advise you to stay away from the FPO on two fronts:

For Short Term Traders: Why should a share trade at Rs 19, when it is available in primary market at Rs 12? Even if it stays at Rs 19 post FPO, it will see selling pressure from new allottees who want to book a instant profit.

Remember there would also be no dearth of liquidity, Yes Bank FPO will add nearly 1,250 Cr shares more. If in case share price stays at same level, then even if it 5% of the allottees try to sell, it will result in stock price hitting lower circuits. Despite all of this if stock price still sustains the current levels, then you just got lucky!

For Long term Investors: The price is good only when you know the value of what you are buying. And like we’ve shown, there’s not much value in there.

If I Cannot Go Long, Then Can I Short?

Yes Bank is not part of F&O, so shorting Yes bank is slightly tricky here.

You can use the “SLB” – a Stock Lending and Borrowing Mechanism to borrow and short shares. This is fraught with extreme risk, so don’t even look deeper here.

You need to first borrow the shares of Yes Bank in the market by paying some premium, sell them (at Rs. 19 or so) and return the shares in about a month.

The current premium on Yes bank shares stands roughly at Rs 5.2, for maturity at Aug 6-2020. Borrowing at Rs. 5 allows you to sell at Rs. 19 – making the effective sell price Rs. 19-5=Rs. 13. There’s GST on the borrowing price, and some other brokerage fees etc. which makes the effective sell price even lower.

The pricing in SLB and taxes effectively negates all the arbitrage here, but that was an avenue a few smart investors did take earlier this month.

Trades in SLB since the beginning of this month are as below.

The 15,000 cr. Yes Bank FPO: Should You Invest?

As of 16th July 2020 Yes bank has 11.2 Cr shares as open positions in SLB

Our View: Avoid

We wouldn’t recommend Yes Bank shares at any price more than Rs. 10, and even that would be with a lot of caveats. It’s not a healthy bank going into Covid, and it will have issues coming out of it. We could of course be horribly wrong.

The arbitrage, and even short term trading metrics, are not in favour. You can’t easily go short, but this stock is likely to be extremely volatile on the downside after the FPO allocations are done. If you don’t own it, we wouldn’t unnecessarily add it to your calendar or portfolio. If you do, and believe strongly that it has a future, why not own it Rs. 7 lower than today’s price?