Yes Bank is facing the same fate as the PMC Bank, with RBI placing the bank on Moratorium. This was seen as coming and its come at a time when India’s slowing economy is faced with issues of Corona Virus. The effect of Yes Bank’s collapse will be felt across all markets with Sensex, Nifty falling sharply, INR weakening and credit markets becoming more frozen and illiquid. There could be a flight to safety to government bonds.
More importantly, the weaker private sector banks, NBFCs and HFCs will face the brunt of Yes Bank collapse with equity prices and bond prices falling sharply. Depositor worry will hurt these lenders.
The borrowers too will face credit issues as the weaker ones may not be able to service loans in face of lack of availability of credit. This can hurt portfolios exposed to credit risk as spreads will rise sharply.
Markets will chase safety and liquidity.
Our Note on December 13th 2019 – Yes Bank is RBI’s Baby Now Even as Promoters Laugh All the Way to the Bank
Yes Bank’s failure to raise capital this month has caused the share price to fall sharply by 33% from highs seen in the last one month, raising fears of the Bank’s solvency. Given the Rs 3 trillion balance sheet, any solvency issues could lead to a contagion market effect and the RBI has a difficult call to make on bailing out the bank through forced merger. This will be positive for bonds but equity shareholders will face the brunt of the forced merger.
This leads to a moral issue of allowing banks to grow unchecked and then bailing them out when in trouble, after the promoters rake in the riches from higher valuations given to the bank before its collapse.
The question is who bears the cost of merger, tax payers in case of PSU bank merger or shareholders in case of private bank merger?
Global rating agency Moody’s has downgraded the bank’s long-term foreign and local currency bank deposit ratings to B2 from Ba3, foreign currency senior unsecured MTN program rating to (P)B2 from (P)Ba3, and Baseline Credit Assessment (BCA) and Adjusted BCA to b3 from b1. Factors such as bank’s pool of potential stressed assets and low loss-absorbing buffers against those assets ( which may add pressure to its funding and liquidity, creating additional risks to its standalone credit profile) were the reasons for this downgrade. Moreover, the rating agency said that YES Bank’s common equity tier 1 (CET1) ratio of 8.7% at the end of September 2019 will come under significant pressure unless the bank can raise new capital in the next few quarters.
The bank’s reported asset quality deteriorated further in Q2FY2020 with gross and net NPA of 7.4% and 4.4%, respectively as compared to 5.0% and 2.9%, respectively during the previous quarter. The slippages in Q2FY2020 were both from the BB and below rated exposures at Rs. 37.30 billion and from the investment-grade book valued at Rs. 22.20 billion. Despite the slippages in Q2 FY2020 from BB and below rated exposures, these exposures increased further to Rs. 314.00 billion (10.1% of gross exposures) from Rs. 294.70 billion (9.4% of gross exposures) as on June 30, 2019 partly on account of a downgrade in some of the exposures to stressed groups.
Yes Bank’s overall capital adequacy under Basel III came in at 16.3% with CET-I of 8.7% as on September 30, 2019 as compared to 15.7% and 8.0%, respectively, as on June 30, 2019. While the CET-I of 8.7% as on September 30, 2019 was higher than the RBI’s threshold limit of 7.375% as on March 31, 2019 , the need to raise capital is imminent as CET-I requirement of 8.0% for March 31, 2020 and the sizeable stressed exposure in relation to the equity capital.
While bank’s exposure to the corporate sector has been declining on account of the management’s focus on growing the retail book, it stood high at 61.9% as on September 30, 2019 as compared to 65.6% as on March 31, 2019 compared to the banking sector average of around 40%. The high share of corporate advances has impacted the bank’s asset quality. YBL’s top 10 group exposures contributed for 18.8% of the total exposures and 272% of the Tier I capital as on March 31, 2019, while the top 20 advances stood at 14.3% of the overall advances as on March 31, 2019.
Regarding the bank’s liquidity position, its daily average liquidity coverage ratio (LCR) stood at 113.83% in Q2FY2020 from 117.30% in Q1FY2020 which is higher than RBI’s requirement of 100% as on January 1, 2019. According to the structural liquidity statement as of September 30, 2019, YBL has 1-year negative cumulative asset-liability mismatches of 9.96% of total outflows (10.8% of total outflows as on May 15, 2019 and 8.0% as on March 31, 2019). However, as the bank can access to call money market and MSF of RBI in case of any liquidity urgency, its liquidity position is expected to remain comfortable.