If the reports are true that India’s largest lender State Bank of India will lead a consortium to invest in capital-starved Yes Bank, it is good news for the private sector bank and its shareholders. However, it could well turn out to be a risky bet for SBI, as analysts have raised questions over the quality of Yes Bank’s assets.
The private sector lender, which has seen a rise in non-performing assets in recent years, has been looking to raise much-needed funds for quite some time now. In January, Yes Bank’s board had rejected an investment proposal from Canadian investor Erwin Singh Braich and Hong Kong-based SPGP Holdings.
Last month, the lender said it has received a non-binding expression of interest from several investors. However, no final deal has been done yet.
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Now, it seems, the government wants SBI and other banks and financial institutions to bail out the lender, given that the lender has found it tough to find investors and Yes Bank’s troubles would only mount unless it gets funding.
However, the risks for any bank to acquire Yes Bank are high. Suresh Ganapathy, an analyst at Macquarie Capital Securities, wrote on Thursday that the bank’s net worth may indeed be zero, assuming a large portion of its below investment grade assets were wiped off.
“Yes Bank has a net worth of Rs 25,000 crore. Its below investment grade book (BB and below) is at Rs 30,000 crore and BBB book is at Rs 50,000 crore. If we assume a substantial portion of BB and below book is wiped off and say 10-15 per cent of BBB book is to be written off, it implies the current net worth of the bank is zero (after factoring in 25 per cent tax benefits),” Ganapathy said in a report.
“Ideally and theoretically speaking, SBI and other PSU banks need to buy the bank at Re 1,” the analyst said.
There was no confirmation on the reports by SBI. Yes Bank also clarified that it had not received any such communication from RBI or government or regulators or SBI and it was unaware of any such decision.
The bank continues to explore various means of raising funds, it said.
Meanwhile, Yes Bank shares rallied 26 per cent on Thursday to close at Rs 36.85, following the reports of a likely SBI-led investment.
Saurabh Kumar of JP Morgan feels the rally in the stock was unjustified as he believes the “quasi-sovereign bailout would be a bondholder/depositor bailout and not equity one.”
The investment bank cut its target price on the stock to just Re 1, expecting the new capital to come in at a huge discount to the current share price.
“We believe forced bailout investors will likely want the bank to be acquired at near-zero value to account for risks associated with the stress book and likely loss of deposits,” Kumar said.
In the second quarter, Yes Bank reported a net loss of Rs 600 crore on deferred tax asset impact. Its gross NPAs had surged to 7.39 per cent in September from 5.01 per cent in June. It has yet to announce results for the quarter ended December 2019.
Kumar also feels the implications for SBI are incrementally negative for its valuations as it sets a “precedent for nationalisation of future private losses.”
He believes that the net worth can buffer most of the losses realised from the stressed book at the bank, but still, $2.5 billion to $3 billion would be required to recapitalise the bank.
