The fact that government is considering such a bail out proposal clearly shows the risk inherent in investing in PSU banks/companies who continue to be subjected to the vagaries and compulsions of the government. The bigger casualty is taxpayers as their money is being used to infuse capital in PSU banks time and again. In other words, it is the taxpayers who are bailing out YES Bank
indirectly in our view.
One buys a bank for its liabilities franchise and not for its assets. We are unsure of YES Bank’s quality of liabilities franchise, which perhaps could have further got affected due to the current solvency issues. Consolidation would have brought about a lot of integration challenges as well as legal challenges as we believe SBI Act needs to be amended for SBI to acquire a private sector bank. Even in this case, the deal will require blessings of the regulator as well as the Government.
The quasi sovereign bailout (by SBI/LIC) is in fact bond holder / depositor – led bailout and not an equity one. In sum, we think the bank will need to be recapitalised at nominal equity value and could test dilution of AT1s. We remain underweight and cut our target price to Rs 1 as we believe net worth is largely impaired.
The main focus in the near-term will be on the new investors of the restructured Yes Bank, the risk of deposit exodus from this entity and on writedowns due to Yes Banks’s failure. Even if the restructured Yes Bank lowers near-term market concerns, we believe broader financial stability risks remain.
Yes Bank’s deficiency is likely to result in some writedowns for other entities. While inter-bank exposure to Yes Bank is likely maybe limited, mutual funds have around Rs 2,800 crore of debt in total exposure. Instruments issued by the bank for Additional Tier 1 capital will be written off (around Rs 8,500 crore).
Yes Bank’s failure may prompt a shift in deposits from smaller private sector banks to the perceived safety of public sector banks. This in turn will constrain the ability of these private sector banks in growing their loan book. There is also an adverse impact on both demand and supply of credit.
Flight of deposits from smaller/mid-sized banks will probably intensify in favour of larger banks like SBI /HDFC Bank / ICICI Bank / Axis Bank. Smaller banks and regional SCBs could see some deposits move to more established banks.
While these smaller banks/RBI would step in aggressively from preventing such a run from intensifying, we believe this would be a scare and stocks of mid-sized banks would correct because of this. It is possible that these banks may also have to maintain higher capital and regulatory reserves to demonstrate their stability to depositors, shareholders, credit rating agencies and regulators in the near-to-medium term.
This is for the first time in the history of the Indian Banking sector that a bank’s T1 bonds is being written down at the ‘point of non-viability’ (PONV) i.e. the investors have to take a hit on both principal and the balance interest payments. We understand that the outstanding additional T1 (AT1) bonds issued under Basel III norms for Yes Bank stands at Rs 10,800 crore. Clearly, the investors in such AT1 bonds, mainly comprising mutual funds and banks’ treasuries will need to take a significant hit due to this development. This will limit the market for AT1 bonds in India only to issuances by a few large public sector banks and further, the pricing will see increased differential with that of Tier-2 bonds to reflect the differential risk.
The banking system is based on goodwill and trust. Given the recent events (incl. at PMC and Yes), new age private banks and smaller regional banks may see slower deposit growth. Banks such as South Indian Bank and Karnataka Bank, which are trading significantly lower than their book have higher risk scores given their low capital, low coverage ratios and higher sub-investment-grade book. Banks such as Axis Bank, City Union Bank and DCB Bank, which are trading at a premium valuation, have low risk-based scores.
However, with a greater proportion of bulk deposits, lower coverage ratios and relatively lower CET-1, Indusind Bank seems to be trading at higher valuations taking into account its risk score. Karur Vsysa Bank on the contrary, based on its risk score is trading at a significant discount.