FPO analysis: Yes Bank

Recommendation–AVOID

About the issue

Yes Bank, one of the private sector banks, has come out with its further public offering (FPO).

The price range for the FPO has been fixed at Rs 12-Rs 13 per equity share and the issue will open on July 15, 2020 and close on July 17, 2020. Through FPO, the company is expected to raise Rs 15,000 crore at an upper price band of Rs 13 per equity share.

Out of this, Rs 200 crore is reserved for eligible employees. The funds raised will be used from ensuring adequate capital to support growth and expansion, which will include enhancing the bank’s solvency and capital adequacy ratio (CAR).

As of March 31, 2020, the bank’s CET 1 ratio was at 6.3 per cent. Reserve Bank of India (RBI) had prescribed a minimum CET 1 ratio of 7.375 per cent by March 31, 2020. This minimum CET 1 ratio requirement will increase to 8 per cent by September 30, 2020. In order to comply with the requirements of RBI with respect to CET 1 ratio and support the bank’s growth plans, it is important to have an adequate equity capital.

About the bank

Yes Bank was incorporated on November 21, 2003 and was listed on BSE and NSE in 2005. Yes Bank is a full-service commercial bank, specialising in merchant banking, digital banking, brokerage business, asset management and investment banking. It has a presence in all 28 states and eight union territories in India, including one representative office in Abu Dhabi.

As of March 31, 2020, the bank had a network of 1,135 branches and 1,423 ATMs. Its’ extensive network of branches includes 250 hub branches, 850 spoke branches, with approximately 85 per cent of their branches with more than three years vintage.

As of March 31, 2020, Yes Bank had three subsidiaries, YES Securities, YES Asset Management (I) Ltd (YAMIL) and YES Trustee Ltd (YTL). YES Securities is engaged in the business of merchant banking, investment banking, institutional sales and trading and equity research. YAMIL offers the services of an investment manager and YTL acts as a trustee to YAMIL.

On March 5, 2020, Central Government, based on RBI's application, imposed a moratorium that came into effect on March 5, 2020, and would go on till April 3, 2020. RBI superseded the board of directors of the bank on March 5, 2020. Subsequently, on March 6, 2020, RBI proposed a draft reconstruction scheme. Further on March 13, 2020, Government of India notified Yes Bank Ltd Reconstruction Scheme 2020. Among other things, the reconstruction scheme provided for the cessation of the imposed moratorium with effect from March 18, 2020.

The board was reconstituted with eight eminent professionals having vast experience within the banking industry. As per the reconstruction scheme, new strategic objectives comprises of augmenting deposit base and liquidity buffers, optimising operating costs, building stronger governance and underwriting framework and focussing on stressed assets resolution over the next 6 to 12 months.

Financials

In the aftermath of the Infrastructure Leasing & Financial Services (IL & FS) crisis in September 2018, the financial sector had been heavily constrained from a liquidity standpoint.

Furthermore, rising defaults in the power and infrastructure sectors in the second half of 2019 had taken a toll on the stressed book of the bank. Given the low capital buffer in this macro-environment, the bank was adversely impacted on the account of elevated slippages in corporate book, especially in power and infrastructure sectors.

In addition, while the statutory liquidity ratio (SLR) as on March 31, 2020 satisfied the regulatory requirement, the bank breached the regulatory minimum SLR during the fiscal year ended March 31, 2020. The bank also breached our liquidity coverage ratio (LCR) during the fiscal year 2020. This is largely due to the deposit outflow in early October 2019 on account of a combination of events such as the invocation of promoter’s pledged shares and IT glitches at the bank.

The above factors led to a rapid deterioration in the financial position of the bank. Looking at the uncertainty surrounding a credible plan for infusion of capital, RBI took immediate action in the interests of the depositors and the public on March 5, 2020, and soon after that, the bank was placed under moratorium.

The table below clearly shows the deteriorating financial condition of the bank. The total assets of the bank have decreased from Rs 3,80,859.61 crore as of March 31, 2019, to Rs 2,57,832.164 crore as of March 31, 2020, a decline of 32.30 per cent.

Total deposits have decreased from Rs 2,27,557.903 crore as on March 31, 2019, to Rs 1,05,311.168 crore as of March 31, 2020, a decrease of 53.76 per cent. The decrease in deposits was primarily triggered by a moratorium on another co-operative bank, together with a fall in stock price due to the sell-down by promoters of the bank. Accordingly, depositors’ confidence was affected, which resulted in an increase in deposit withdrawal.

Bank’s net profit decreased from Rs 1,709.66 crore as of March 2019 to a loss of Rs 16,432.58 crore as of March 31, 2020 due to an increase in NPA from Rs 7,882.559 crore as of March 31, 2019 to Rs 32,877.588 crore as of March 31, 2020.

In addition, the number of branches has increased from 1,120 as of March 31, 2019 to 1,135 as of March 31, 2020.

Valuation and recommendation

The offer is being made at almost 40 per cent discount to the current share price of the bank. Despite such a discount, the offer is available at more than 0.8 times the post-issue price to book value. It will become even more if we adjust book value for non-performing assets (NPAs). There are many banks that are available at a better valuation to choose from. Therefore, you can skip this issue.