Yes Bank-What’s next?

Eventually, Yes Bank may merge with Kotak Bank

India’s 6^th largest private bank Yes Bank was regarded as a new generation private bank along with Kotak Bank and Indusind Bank. But the sad failure of Yes Bank highlighted India’s terrible issues of corporate governance, and the NPA crisis, and also shows the fact that the Government may not allow any systematically important private bank/NBFC to fall. Thus a private bank like Yes Bank is also under the ‘too big to fall’ category in India.

Soon after Yes Bank’s collapse in 2020, Government/RBI virtually took over the bank through India’s largest PSU Bank SBI, which now owns 30% of Yes Bank's stake along with LICI (4.99%). Also, Government invited some big private banks/NBFC groups to take part in the Yes Bank rescue project. As a result, ICICI Bank owns 3.99%, HDFC 3.99%, Axis Bank 1.96%, Kotak Bank 1.52%, HDFC Life 1.37%, and Bandhan Bank 1.20%.

Thus new Yes Bank is now virtually a government (SBI) controlled private bank in collaboration with some private entities (banks/NBFC); i.e. a PPP Bank (public, private participation)! The new Yes Bank is now being managed by CEO Prashant Kumar, who was an erstwhile SBI stalwart and a credible name in the banking industry. All these steps and bailout by the BJP Government helped the rebirth of Yes Bank, which was set up in 2003 originally by top-notch professionals led by the Kapoor family (Ashok and Rana Kapoor) at the invitation of the erstwhile UPA government/admin. Subsequently, the new Yes Bank regained public as-well-as investor trust.

Before the failure of Yes Bank, the private lender was suffering from serious corporate governance issues including under-reporting of NPAs. All of these led to a rating downgrade, an inability to raise fresh capital to cover surging NPA provisions, invocation of bond covenants by investors, and a steady withdrawal of deposits. Despite various efforts, old management failed to bring any credible long-term investor to revive the Yes Bank, which led the Government/RBI to intervene in the public interest as well as to keep financial stability.

Erstwhile Yes Bank CEO Rana Kapoor, who was once seen as ‘Poster Boy’ of new generation private bank is now facing various accusations of money laundering, criminal conspiracy, criminal breach of trust, cheating, and forgery for diversion of public money in collusion of certain borrowers (as a result of extreme greed). Rana Kapoor is accused of directly being involved in the ‘dirty loan’ scam (cut money), where Yes Bank gave the loan to certain sub-prime corporates/business houses, knowing fully that such loans may be never paid back or serviced appropriately. There is also a corruption allegation between Rana Kapoor & Co with INC's top leadership.

In brief, the credibility of Yes Bank's top management was at stake and RBI/Government virtually took control of the bank through SBI to prevent Yes Bank from total closure, which may cause another wave of financial stability. The RBI superseded the Board of Directors of the Yes Bank and imposed a moratorium on a bank from 5^th March 2020. Subsequently, the Government of India approved the ‘Yes Bank Reconstruction scheme, 2020’ and the scheme came into effect on 13^th March 2020 accordingly SBI’s Prashant Kumar was appointed as MD & CEO.

As per the Yes Bank reconstruction scheme, the moratorium was lifted on 18^th March 2020 and the State Bank of India (SBI) led group of financial institutions invested Rs.10B. SBI is required to hold a minimum of 26% in the bank for 3 years and other investors are required to hold 75% of their holding for 3 years. Further, the bank raised Rs.15B from other institutional investors in July 2020, which has led to an improvement in its capitalization levels to be well above the regulatory requirement. As of 31^st December 2021, Yes Bank has 1094 branches and 1221 ATMs. Now new Yes Bank (under SBI) is stable, regained public/depositor/investor confidence, and is also in a position to tap market capital for future growth, if necessary.

Yes bank jumped over +34% from March low 12.10 to 16.25 (52-weeks high) on 7^th April in merely 7-trading sessions for various reasons:

·         Reports that PE firm Carlyle may acquire a 10% stake in the bank

·         Kotak Bank, which has already a 1.52% stake in the Yes Bank, also approved Rs.0.50B for further infusion in Yes Bank

·         There is a strong rumor that eventually Yes Bank may be merged with Kotak Bank and SBI, which holds around a 30% stake in Yes Bank may exit after Mar’23 lock-in period ends

·         Rating upgrade by Care (from BBB TO BBB+)

·         Positive business update for Q4FY22; net advances growth +3% (q/q); +8.8% (y/y); CASA growth +9.7% (q/q) and +44.3% (y/y)

·         The market is now expecting improved NIM (net interest margin) as well as NII (net interest income) for Q4FY22 amid lower NPA and higher recoveries 

Highlights of Q3FY22 earnings: Yes Bank

The core operating EPS; i.e. EBTDA/Share was Rs.0.33 vs Rs.0.31 sequentially (+6.22%) and Rs.0.95 yearly (-65.12%).

Fair Valuation of Yes Bank: Rs. 40 by FY25 (standalone)

In FY17, the core operating income of Yes Bank was around Rs.6.17B, whereas in FY21, it was around Rs.5.33B. But in FY21, the Equity share capital was around Rs.5B against Rs.0.46B in FY17, resulting in a core operating EPS of around Rs.2.13 vs 27.02. Apart from the issue of legacy NPA (now around Rs.28B), almost 15% of the advance, the main problem for Yes Bank's valuation is its huge Equity capital after SBI and others bailed out the Bank. The huge infusion of Equity capital was necessary at that time to keep Yes Bank afloat.

As per the present QTR run rate, Yes Bank may report Rs.0.35 core operating EPS in Q4FY22, which will translate to FY22 core operating EPS at Rs.1.40. Considering standalone Yes Bank, present quarterly run rate, improving asset quality trend, Yes Bank may report a +20% growth in core operating EPS (normal trend rate in well managed private banks). This will translate to a fair valuation of 23-28-34-40 by FY: 22-25. Consistent growth in CASA deposits and advances coupled with comfortable NPA provisioning and regulatory capital may help. Also, there is improvement in overall profitability and asset quality, despite elevated slippages as recoveries/up-gradation gain traction.

In FY21, the gross NPA for Yes Bank was around Rs.29B against Rs.8B for Kotak Bank. The headline EPS will improve for Yes Bank if it’s able to recover its legacy NPA. Also if Yes Bank can slash its huge Equity capital, then EPS will jump. The merger of Yes Bank with another Bank like Kotak may pave the way for the revaluation of Yes Bank.

Although Yes Bank’s capitalization levels are adequate, the net profitability of the bank remains weak due to higher provisioning. Further, the bank had a high amount (although declining over the last two quarters) of SMA 1 and SMA 2 accounts, which could impact the profitability in the near term. However, the bank expects a recovery of around Rs.5B from its NPAs, and the income from recovered accounts is expected to be higher than incremental provisioning helping the profitability for the year.

Yes Bank’s focus now shifted towards retail lending rather than too much dependence on corporates:

Before restructuring, Yes Bank’s loan book was comprised of 60% corporate and 40% retail loans. Yes Bank now aims to maintain the reverse ratio; i.e. 60% retail and 40% corporate loans. As per reports, erstwhile Yes Bank CEO personally approved huge loans to various sub-prime/defaulter corporates as above for a huge upfront fee and personal kickbacks as no other banks were ready to extend loans to those sub-prime corporates.

Yes Bank’s advances declined by around 29% from Rs.2.42T on 31/03/19 to Rs.1.71T on 31/03/20 and further declined by 2.65% to Rs.1.67T on 31/03/21 mainly on account of a decline in corporate loans. Yes Bank, under new management (SBI led consortium) changed its approach and has focused on granularization of its loan book and within the corporate segment; mainly focused on working capital and transaction banking business. As a result, the share of corporate advances declined from 65.6% on 31/03/19 to 48.90% on 31/03/21 whereas the constitution of retail advances increased to 29.90% on 31/03/21 and 33.75% on 31/12/21 against 16.7% on 31/03/19; corporate portfolio declined to 42.60%. In the medium term, Yes Bank has the objective to granularize its advances with a plan to have a proportion of high-yielding retail, SME, and MSME advances above 60% of total advances.

The asset quality parameters of Yes Bank continue to remain under pressure with moderate recovery in the corporate legacy NPAs and slippages in the retail and MSME advances book impacted by COVID-induced lockdown. The bank reported a gross NPA ratio of 15.41% and a Net NPA ratio of 5.88% as of 31/03/21 as compared to a Gross NPA ratio of 16.80% and Net NPA ratio of 5.03% as of 31/03/20.

Post the capital infusion; Yes Bank’s cushion to absorb NPA shocks has improved with Net NPA to Net worth ratio improving to 41.51% on 31/03/21 from 64.14% on 31/03/20. Yes Bank has been making adequate provisioning and the provision coverage ratio; i.e. PCR including technical write-offs stood at 74.6% as of 31/03/21 as compared to 68.5% as of 31/03/20.  The slippage ratio was at 3.18% as of 31/12/21 as compared to 6.43% for FY21. The bank saw slippages in the corporate as well as retail book; however, they were offset by upgrades and recoveries resulting in Gross NPAs remaining at a similar level as on 31/12/21. The Gross NPA ratio declined to 14.65% and the net NPA ratio declined to 5.29% with growth in advances in Q3FY22.

The total gross non-performing exposure (including advances, investments, accounts sold to ARC, and standard restructured accounts) was at Rs.44.553B (~25% of total loans) as of Q3FY22 vs Rs.44.791B (~27% of total loans). The overdue book (31-90 days) stood at Rs.7.248B as of Q3FY22 vs Rs.11.565B in Q2FY22.

Going forward, while recovery through the resolution of the corporate NPAs would help the bank improve its asset quality parameters, arresting the fresh slippages because of the COVID impact would be a challenge for the Yes as-well-as other banks.

As per reports, in FY19, the total dues of loan defaulters for Yes Bank were around Rs.60B, and out of that, the top 10 corporate loan defaulters owe Rs.36B to Yes Bank. This includes Reliance Anil Dhirubhai Ambani Group (Rs 12.8B), Subhash Chandra-Essel Group (Rs 8.4B), DHFL Group (Rs 4.735B), IL&FS (Rs 2.5B), Jet Airways (Rs 1.1B), Kelkar Group-Cox & Kings, Go Travel (Rs.1B), Eveready-B M Khaitan Group (Rs 1.25B), Omkar Realtors (Rs 2.71B), Radius Developers (Rs 1.2B), C G Power-Thapar Group (Rs 0.5B). The NPA list also includes Bharat Infra and McLeod Russel Assam Tea. Almost 95% of Yes Bank’s GNPA is from defaulted corporate loans.

Overall around 44 corporates from 10-big industrial groups took huge loans from Yes Bank. This list of corporates shows the Yes bank’s exposure to most stressed/sub-prime corporates that operate in sectors including those relating to infrastructure, real estate, telecom (VDL?), and the financial sector.

Highlights of Q3Y22 earnings concall:

·         Opened more than 100K CASA customers and crossed 1M credit cards

·         Crossed 3T balance sheet size for the 1^st time after Sep’19

·         Stressed on digital, retail banking/lending

·         Total deposits were around Rs.1.84T, up +7.6% sequentially and +47.5% annually; the CASA ratio was 30,4% and the growth rate was double the overall deposit

·         Cost of deposits 4.9%, lowest for the 1^st time ever

·         Advance ratio already 57:43 (Retail: Corporate), up 300 bps sequentially and against medium-term target 60:40

·         Steady sustainable lending growth in retail, SME, and wholesale segment

·         NIM at 2.4%, up 25 bps sequentially mainly due to a 30 bps drop in the cost of deposits

·         The fees income of retail banking was upbeat

·         Operating profit was also undercut by an increased cost in the launching of a new    credit card business

·         Slippages significantly dropped by 50% to Rs.0.978B against Rs.1.783B sequentially amid improvement in retail and corporate stressed asset, leading to lower GNPA at 14.7% vs 15% in Q2FY22

·         Retail slippage at Rs.0.388B vs Rs.0.888B sequentially

·         Corporate slippage at Rs.0.435B vs Rs.0.750B sequentially

·         Cash recoveries Rs.0.610B; upgrades Rs.0.573B; improving overall credit costs

·         Overdue loans in the 61 to 90 days bucket are stable while in the 31 to 60 days bucket is higher by Rs.1.60B sequentially predominantly on account of one large infrastructure group, which is fully backed/secured by strong and highly valued collateral

·         The marginal increase in the total gross restructured loans is on account of DCCO, Covid, and MSME-2.0 restructuring during the quarter

·         Remain on track to achieve greater more than Rs.5B of recoveries and upgrades as per FY22 guidance; already done Rs.4.320B by Q3FY22 across the retail and corporate segment

·         Expect the asset quality to continue to improve. The process to form the ARC and complete the transfer of legacy stress asset is on track and we expect to complete this exercise by March 22 or latest by the first quarter of the next financial year

·         All NPL will be transferred to the new ARC in early FY23

·         Adequate regulatory and reasonable equity capital; the bank will not raise equity capital now but may continue to evaluate the need for additional equity capital to support future business growth

·         Taken various employee-friendly steps to prevent any unusual attrition and to increase trust in the bank

·         Rating upgrades by various rating agencies amid expectation of a further improvement to the bank's credit profile driven by the cleanup of legacy stress and improvement in capital and profitability

·         Total stressed assets/loans around Rs.55B; bank recovered Rs.5B; i.e. 10% despite various legal hurdles in recovering loans through legal means and COVID disruptions

·         Bank already provided 80% provisions on this overall stressed assets of Rs.55B; the bank does not see any requirement for further provision due to higher recoveries

·         Bank does not see any requirement for higher provisions either on the restructured or SMA-1/2 books

·         Looking ahead, the Bank is quite confident of higher recoveries and lower NPA/fresh slippages

·         Increase in retail fee income on a sequential basis, but some pullback in corporate fee income amid subdued bullion market, but going forward it should recover

·         Planned new ARC will ensure the transfer of legacy stressed assets without the requirement of additional provisions, while the whole transaction would be capital accretive

·         Some increase in operating expenses due to higher network charges and ad campaign costs for new credit card business coupled with special COVID insurance policies for employees

·         Banks will not offer high deposit/savings rates going forward; the difference/spread in FD rates with larger banks already come down to 65 bps and may come down more

·         Bank does not see any incremental cash flow issues in retail loans, which were put under the COVID moratorium; most of the borrowers didn’t take the dispensation and continue to service the loan

What’s next for Yes Bank? Will it merge with Yes Bank?

The Indian Government may not acquire a private bank like Yes Bank permanently through SBI. Thus Yes Bank eventually will have to be handed over to a credible private bank group, having a very deep pocket. Considering all the pros & cons, Kotak Bank may be an ideal candidate, which can merge Yes Bank with itself for inorganic growth and synergy (including ARC). Other credible big private bank/financials groups like HDFC are merging with HDFC Bank may not consider such a merger with Yes Bank. ICICI, Axis, and Indusind Bank have their issues and Government/RBI may not allow such a merger. Thus Kotak Bank may be the focus of any merger with Yes Bank in the coming days after the ‘failure’ of Axis Bank to acquire Citi Bank's credit card business in India.

Kotak Bank management is keen on inorganic growth as long as it’s sensible. In the past, Kotak has reportedly held merger talks with Axis and Indusind Bank. Now Kotak may eye Yes Bank, IDFC First, and Federal Bank to create a big private Banking group (after ICICI, HDFC, and Axis Bank). The Indian Government may be also comfortable with the idea of consolidation in private/public bank space with the presence of four big private banks and two PSU banks (SBI, PNB).

Bottom line:

The next trigger of Yes Bank may be the formation of an ARC coupled with merger news with any big private bank like Kotak. In any way, after the formation of an ARC and transfer of legacy stressed assets, Yes Bank may get a new boost as it will eventually help to lower the huge equity capital base. Yes Bank, under the reconstruction phase, raised around Rs.25B, equivalent to Bank’s GNPA/NPL. After the transfer of this GNPA/NPL to the new ARC, this capital may be used for future growth/expansion and the bank may also announce a buyback of shares to reduce equity capital and boost the EPS. In any way, the worst for Yes Bank may be already over and it may be an example of a good business in temporary distress; the underlying adversity may be also an opportunity for long-term investors.

Looking ahead, whatever may be the narrative, technically, Yes Bank has to sustain over 16.25 levels for a further rally to 20.00-21.00; otherwise, it may fall to 13.00-12.00 levels, which is a good demand zone for the stock.

Yes Bank: P&L A/C analysis

Articles

Comments