Capital may not come cheap for YES Bank amid cloud over asset quality

When little is going in favour of YES Bank, an adverse report by UBS Securities accentuated concerns on the bank’s asset quality. It took the stock price to a fresh low of Rs 117 apiece — close to the level at which it traded more than three years ago. 

With a 50 per cent depletion in its stock price since its March quarter (Q4) results were published on April 26, all eyes will now be on how soon the lender can raise Rs 3,000 crore of capital. 

At 8.4 per cent common equity tier-1 ratio, YES Bank’s capital adequacy is dismal. Fund infusion is, therefore, critical — not only to support asset quality clean-up, but also to aid growth in FY20. 

At what price capital flows into the bank will also be monitored, considering the potential dilution that existing investors may have to bear. Analysts at Jefferies had earlier pegged availability of capital at Rs 200 per share, which, on the then market price, worked to 19 per cent premium.

However, given the turn of events — be it rising doubts over YES Bank’s asset quality, or operational pressures surrounding the bank — premium valuations now appear to be a big ask. 

Exposure to troubled names such as DHFL, Anil Ambani-led Reliance group, and Essel group companies has led the Street to believe that the Rs 2,100 crore of contingent provisioning in Q4 may not be a one-time cost as envisaged by the new CEO, Ranveet Gill. 

“Even as the management highlights these as cases of timing mismatch rather than cash flow issues, we weren’t convinced that non-performing assets or credit costs could be lower than the circled ones,” analysts at Jefferies noted. 

Caught between capital crunch and the NPA clean-up, UBS has slashed its earnings expectation by 79 per cent for FY20 (highest downgrade so far) and ascribed price-to-book multiple of 0.7 times its FY21 book, suggesting that capital may possibly be infused at a discount. 
In fact, Suresh Ganapthy of Macquarie Capital has questioned news reports on private equity interest that the bank is garnering. “We are unsure how one can make an investment decision when there is so much uncertainty and spate of negative developments,” he remarked. 

Yet, be as it may, it is extremely vital for YES Bank to find success with the capital raising exercise, and that too within a reasonable deadline, for the private lender to regain lost ground.

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