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Bailout plans - no value for minority shareholders…
The Reserve Bank of India (RBI) has placed a temporary moratorium on Yes Bank for a month till April 3, 2020 and restricted withdrawal to | 50,000 per customer from deposits. The extreme step of moratorium by the RBI does indicate the pressing need of the bank for capital and liquidity. According to RBI, discussions with Yes Bank were on for months but nothing could materialise on fund raising. Hence, the action was well considered after assessing the situation. The restoration will be done swiftly within the 30- day time frame to finalise the bailout plan as per RBI Governor.
Ensuring depositor’s safety is RBI’s main objective and will be done. In the plan being discussed, media sources mentioned that SBI is expected to form a consortium with other banks/Life Insurance Corporation of India (LIC) and buy ~49% stake in the troubled Yes Bank, providing it much needed capital support. Initial plans seem to indicate at equity investment or Tier I instruments by buyer banks but a merger cannot be completely ruled out if capital requirements keep rising to provide for stress and consortium members do not agree.
All these will lead to huge dilution, leading to value erosion for minority shareholders. Equity shares have lost value as with huge writeoffs pending, networth is already eroded.
View - Just like the large NCLT cases, a bailout involves bringing in fresh equity at extremely beaten down value (like | 1-2) by the fresh buyer. Accordingly, minority shareholders will be reduced to a very small percentage stake from current large position. In all cases, minority shareholders are set to lose and recommend that existing shareholders exit positions. We rate the stock as Sell (from Reduce earlier).
In our estimates, we have not factored huge dilutions (post current 49% bailout buy), required for large fund raising not known at this point and which could lead to value erosion for minority shareholders.
Stressed asset quality remains cause for concern
Absolute GNPA and NNPA were at Rs 17134 crore and | 9757 crore, respectively. Its GNPA already surged 238 bps QoQ in Q2 to 7.39% while NNPA ratio had surged 144 bps QoQ to 4.35%. The GNPA and NNPA ratios can go above 10-11% soon as the risk in BBB/BB and below books is estimated to be closer to Rs 30000-40000 crore. If slippages are recognised, capital is needed so that hefty provisions can be made. As on September 2019, Yes Bank’s advances & deposits were at Rs 224381.9 crore and Rs 209422.8 crore, respectively. CASA for Q2FY20 came in at 30.8%. SBI board has approved exploring buying some stake in Yes Bank. SBI’s former DMD and CFO Prashant Kumar has been appointed as administrator by RBI as it supersedes the board of the bank.
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