Whats Wrong with Yes
I have in the past once written on Yes Bank with my view being to ignore Yes Bank as a stock to “Buy”. The price when I wrote the post was around 185, today it trades a touch below the 50 Rupee mark.
The world of finance operates based on Trust. Lose that trust once, its difficult if not impossible to regain it back. As Warren Buffet’ts once said;
It takes 20 years to build a reputation and five minutes to ruin it
Warren Buffett
Jignesh Shah started what was then known as Financial Technologies in 1988. Thanks to the debacle of National Spot Exchange, he was forced to quit his company in 2014. While the company renamed itself to 63 Moons, it hasn’t been able to shake off its past.
The stock couldn’t care less about the name as it still trades 97% below its all time high set in 2008. To give a context about the fall, anyone who bought and continues to hold the company shares anywhere from 2005 is still under water.
NBFC’s had a great run until IL&FS went bust. While IL&FS in itself was not seen as an ordinary NBFC, its sudden death created an environment of fear and panic and one which is yet to see its end. Weaker NBFC’s suddenly saw not only their cost of borrowing raise but many weren’t able to raise even at higher levels.
The 2008 financial crisis in the United States was of a similar nature with no company willing to trust another and lending freezing altogether. While Lehman had a lot of bad mortgage loans on its books, what killed it finally was their inability to raise the capital required even when they had substantial assets.
It was only after its death that the Federal Reserve decided to throw open its window to anyone wishing to avail of liquidity buying all kinds of mortgage bonds. The rest as they say is history.
Bank failures in India post the Nationalization phase have been very few and even those have been mostly limited to Co-operative Banks. The only scheduled bank that went down was Global Trust Bank.
In case of Global Trust Bank, RBI ensured that the banks customers were not impacted by going in for a shotgun marriage with Oriental Bank of Commerce.
Yes Bank has been facing issues for some time now. The very fact that RBI felt the need to appoint a Director on its board showcases the seriousness of the issue. But what is surprising is the lack of clarity when it comes to the future.
Yes Bank has booked losses of 2000+ Crores in the last 3 Quarters. This has meant that it now desperately needs to raise capital to shore up its capital. But what is interesting is the way the capital raise has been played about
In its board meeting dated Aug 30, 2019, the Board approved a resolution calling for the increase in the authorized capital of the company. This was not surprising given that the CEO, Ravneet Gill had way back in June was quoted as saying “The number one priority would be raising capital,”.
Yet nearly 6 months after that we are yet to see Yes raise any capital even as every other day rumours swirl about possible investors who are wishing to invest in the Bank. At the beginning of this month, Yes Bank claimed to have received firm commitments from investors amounting to around $2 Billion and one which was supposed to be approved in the board meeting of 10th December.
Yet, this was the outcome of the board meeting
The outcome of the meeting of the Board of Directors is as follows:
1. The Board is willing to favourably consider the offer of US$500 Million of Citax Holdings and Citax Investment Group and the final decision regarding allotment to follow in the next board meeting, subject to requisite regulatory approval(s).
2. The binding offer of US$1.2 Billion submitted by Erwin Singh Braich / SPGP Holdings continues to be under discussion.
The Bank shall continue to evaluate other potential investors to raise capital upto US$ 2 Billion
In other words, no new issue of shares were made even as the bank continues to try and scamper for new investors before it releases its quarterly results for the quarter ending December 2019.
Another bad loss making quarter could easily push the Capital Adequacy Ratio of the Bank below the RBI mandated 8%. The core capitalisation level for the Bank stood at 8.7% as on September 30, 2019.
The lack of clarity has meant a field day when it comes to rumours that swirl around their capital raising ability. Today for instance,
The constant flurry of news has meant that Volatility has shot up the roof with speculators having a field day.
The inability to raise capital isn’t much of a surprise given how supposedly well run companies like DHFL collapsed like a pack of cards. No one knows how much of debt lent out by Yes is good and without a forensic audit by a neutral agency, its doubtful any major investor will be willing to risk capital or his name in an attempt to bottom fish.
In fact, Macquarie in a recent report wondered whether Nationalization of the bank loomed ahead and that question has been haunting me since I first wrote on Yes Bank. Unlike an NBFC, failure and collapse of a bank can cause unmitigated disaster when the overall environment is already weak.
Post the fall and freezing of depositors amounts at PNC Bank there is a fear that lurks around any bad news that could freeze up the depositors money with no end in sight. To me it’s surprising that RBI is keeping it quiet even as the media has a field day.
In 2008 when rumours were swirling around ICICI Bank, RBI had come out with a statement saying that ICICI had enough liquidity, and RBI was ready to make more cash available to the bank, should it run short.
Yes may not in that situation but as we have seen in the past, things can deteriorate pretty fast. As Andy Mukherjee wrote earlier this month,
Yes, India’s fifth-largest private-sector lender, can’t be left adrift much longer. But the RBI is so distracted fighting other fires that it would rather not have to think about Yes.
https://economictimes.indiatimes.com/industry/banking/finance/banking/view-yes-bank-needs-an-arranged-match-or-its-no-bank/articleshow/72468036.cms
I sincerely wish that Yes Bank can raise capital before the end of this financial quarter for any weakness in numbers can set off a vicious cycle that isn’t easy to firefight.
Disclaimer: I have no personal positions in Yes Bank.
Thank you for putting things in perspective. One of the best articles I have read on Yes Bank and its plight.