Yes Bank comes with a big NO?

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Yes bank ltd is an Indian private bank founded in the year 2004 by Mr.Rana Kapoor & Mr.Ashok Kapur. Headquartered in Mumbai. Yes bank provides a wide range of banking and financial products for corporate and retail customers through retail banking and asset management services.

Yes Bank fiasco! What went wrong?

The central bank (RBI) said that the financial position of Yes Bank has undergone a steady decline largely due to inability of the bank to raise capital to address potential loan losses and resultant downgrades, triggering invocation of bond covenants by investors (currently at SC mercy), and withdrawal of deposits (currently well assured by RBI). But, what led to the situation in the first place?

It all began on March 5th, RBI put a moratorium on Yes Bank, restricting withdrawals to Rs 50,000 per depositor till April 3. It superseded the board of the troubled private sector lender and appointed Mr.Prashant Kumar as administrator. 

Even after multiple attempt to raise capital, the bank faced severe liquidity crunch leading to a disastrous liquidity crisis. By the end of Feb 2019, Yes bank board had lost all hopes to revive the bank to its previous glory. With huge NPA and bad loans, and with a huge amount of stressed assets. Bank was on the verge of bankruptcy! Here is a list of change in bank’s NPA from 2015 till 2020;

 Increasing NPA!

In December 2019, Yes bank CEO Mr.Ravneet Gill had realized that the bank’s only option for revival is to infuse fresh capital and the board is trying all it can to get new capital into the system. In fact, the board has had multiple failures to raise capital.

Fresh capital scheme include, $500 million from London-based Citax Holdings and Citax Investment Group, $1.2 billion binding offer from overseas investors and various private sector lending including investors such as Mr.Uday Kotak and Mr.Rakesh Jhunjhunwala who eventually bought shares worth Rs- 86.89 crore.

Finally, RBI had to enter for a complete restructure of the failed bank and put it under 1 month of moratorium. RBI governor Shaktikanta Das and SBI chairman Rajnish Kumar reached up to a conclusion to firm up the plans on Yes Bank’s reconstruction scheme. Liquidity support from the RBI for Yes Bank is also on the way, by SBI picking up a minimum of 26% stake in the bank at Rs-10 per share for 3 years lock in.

Later, various bank and institutional body such as HDFC bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, RK Damani (D-Mart founder), Rakesh Jhunjhunwala (Investor), Azim Premji Trust (Wipro) and others. It is estimated that the bank would need Rs-22,000 crore for revival and an estimate of around Rs-10,000 crore will be invested by SBI.

With a market cap of Rs-10,000 crore, Yes Bank had very less chance of survival. If not for capital infusion by its peer company as stated above, the bank would have filed for bankruptcy while causing millions of jobs and probably initiating a 2008 like market crash

Yes bank is known for its risky investments, Yes bank used to lend to those companies with negative track record and credit ratings. The management would justify this action by stating that it was acting in the interest of its shareholders by being aggressive in its lending mechanism.

With mismanagement in the company fund and lots of investments in lousy companies, creating huge amounts of NPA and with corruption charges over the founder led to the fall in the trust and goodwill of Yes bank. With very little chance of raising fresh capital, the bank had to rely on its CASA deposit (Current & Savings Account deposit). And, with steady decrease in CASA deposits causing a huge liquidity crunch. It was the end of Yes!

Yes bank price trend:

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Deteriorating corporate governance standards and compliance failure in the bank led to a drastic fall in the share price, here’s the price trend since 2015 till 2020. 

PC: Chartink.com, Yes bank share price. 2015 – 2020.

Once India’s 4th largest private sector bank with over a decade in service riding on heavy bets made by both foreign and domestic investors. But in a short span of just 17 months, the shares of Yes Bank have fallen from its lifetime high. With raising around $2 billion in a massive issue of new shares to institutional investors and family offices to  a situation wherein the management was not able to raise enough capital to float the company.

With having a decent track record in the industry to becoming broke in a matter of 2 years. The mismanagement, corruption and power hungry management made such a wonderful company to go broke. The bank’s initial founder Mr.Rana Kapoor is booked under mismanagement charges for providing bad loans & advances and creating a huge amount of stressed assets thus killing the very bank he started.

With the Covid-19 pandemic based demand crisis, the survival of the bank is at stake. Whilst the entire market is at verge of collapse, even the well-established company with a huge cash reserve will have to fight to survive. Then, how this company with very less to no reserve and huge debt can survive. 

The only reason the company had been able to dodge the bankruptcy was for it was a banking sector and it is said that once a bank fails, it creates a chain of events leading for the entire market to collapse (As we witnessed in 2008 crash, Lehman brothers).

So, how can the company be able to raise further capital?

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Well it’s complicated! It’s FPO

The private lender to launch FPO (Follow on Public Offer) worth 15,000 crore. It’s listing the already listed entity. In an attempt to raise further capital by diluting the equity. Thus, the entire restructuring scheme brought in over 25,000 crore (including previous investments). Thus, saving the bank by providing with sufficient liquidity to overcome the present crisis. 

The FPO to be priced at 12-13 per share available for bidding from 15th July to 17th July 2020. 

With such a huge FPO, the management (led by Mr.Prashant Kumar, the Ex-DMD & CFO of SBI) intend to support the already established but highly debt ridden bank by enhancing its solvency and capital adequacy ratio. Now that the management is changed. With sufficient liquidity in-hand. I’m optimistic over the banks recovery and maybe flourish to its previous glory for the worst is behind us.

Yes Bank: Annual report, Assessment of Going concern.

Only time can tell with certainty in regards to what future the Yes bank holds. 

Disclaimer: All the information on this website is published in good faith and for general information purpose only. 

 

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Rakshith Pai
Rakshith is a CA aspirant with half a decade of investing experience. He manages a private fund management service, AUG Funds. Wherein, AU denotes Gold and AG denotes Silver, the two most precious metals on Earth.
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