Many institutional investors are facing a huge uncertainty in the inability to judge whether the bad loan situation of YES Bank would improve or get worsened. This is a thought-provoking statement from a senior fund manager of a large fund house.
In the last financial year itself, about 100 mutual fund managers have completely disposed of their stake in YES Bank. Even the Ex-CEO Mr. Rana Kapoor has lost $1 billion as shares dropped 78% since August 2018.
During June 2019, YES Bank’s share price tanked 38 %, as investor’s sentiment sank, due to the bank’s investments in debt-laden companies. The benchmark S&P BSE Sensex, in comparison, was down only 1 % during the same period.
As per the figures, the investments by Mutual funds, in this private money lender, has dropped to Rs 1,751 crore in June 2019 from Rs 8,930 crore in June 2018. Though, the sharp fall in the prices of its stock may also be responsible for this.
Ratings of YES Bank
Rating agency ICRA has decreased YES Bank’s long-term ratings on its Rs 32,911.7 crore bond program. The reason is given as an increase in stressed assets and a lack of debt resolutions. The forecast on the ratings remained negative.
Jefferies analysts led by Nilanjan Karfa describe the latest results as “far worse than had been anticipated”. Further, they have cut their price target for the bank to Rs 50 from Rs 80. That straightaway implies a further drop of more than 40 % from the current levels.
There is an ongoing liquidity pressure on the Financial institutions in India. This negative impact was taken into consideration for YES Bank. And still, the ratings have been downgraded due to the bank’s sizeable exposure to weaker companies in the sector. According to the reviews by Moody’s Rating Agency in its Rating Rationale on June 11, 2019.
Investors Backing Away from YES Bank
In June 2018, 227 mutual fund houses had invested in YES Bank a part of their portfolio funding. But by June 2019, the number of mutual fund plans invested in YES Bank got reduced to 132. Implying that around 100 fund managers have backed out from the YES Bank in the last 1 year only.
The stocks of YES bank have been trading at its lowest level since May 9, 2014. The shares of the private sector lender fell by 4% intraday on July 23 after two of its promoters pledged their entire stake.
At the end of June 2019, promoter shareholding in this FI was 19.78 percent, out of which Mr. Rana Kapoor and his wife held 11.88 percent. On July 22, Mr. Rana Kapoor and another promoter, Morgan Credits Private Limited (MCPL) – (which is also held within the family of Mr. Rana Kapoor), in a BSE filing said they have pledged 7.34 % stake during July 18-22, 2019. Mr. Rana Kapoor has pledged his entire holding of 4.3 %. While MCPL pledged its entire shareholding of 3.03 %.
Analysis
YES Bank’s Gross Non Performing Assets (NPAs) and loans that were below investment grade climbed to Rs 41,558 crore in Q1 of 2019 from Rs 30,772 crore in March. After provisions, the Net BB-and below-rated investment exposures and Net NPAs were at Rs 34,082 crore in Q1 as compared to Rs 24,741 crore in March.
About 4.1% of its total loans, representing about Rs 10,000 crore in figures, could translate into NPAs over the next 12 months. Most of these loans were provided to the stressed corporates. These are under the watchlist of RBI.
YES Bank stocks hit a 5-year low last week after it reported a huge 91 % year-on-year (YoY) drop in the net profit for the quarter ended June 30. This is because the provisions have increased to around thrice the size and weak asset quality.
Analysts at WealthBucket feel the problem lies in the fact that the asset quality remains far from comforting. Even though, the net profit at Rs 114 crore, in Q1, was better than steep losses in Q4 of 2018-19.
Last year, the promoter- Ex-CEO Mr. Rana Kapoor, was asked by RBI to leave by January 2019 for lapses on the governance front. Thereby, the mistrust caused a severe dent in earnings for two successive quarters.
The era of rapid growth in the private lender’s loan book has ended, and YES bank is faced with the necessity of raising new capital at a time when its stocks are already under pressure.
Final Notes
Under the new chief executive and managing director, Ravneet Gill would need to arrange fresh capital from Private Equity (PE) Funds. Only this would bring positive stock triggers and instill confidence in the new management.
The bank will also need to speed-up the resolution and recovery of its loans apart from restoring capital growth. The credit challenges it faces include a decline in operating profitability because of interest reversals and moderation in fee income, an increased gross NPAs, a weakened capital cushion, a high share of large-scale liabilities which pushes up interest rates and a high concentration of corporate sector in its loan book.
The good news seems to be already coming. Though not confirmed as yet. WestBridge Capital Partners, Farallon Capital, and GIC, Singapore’s sovereign wealth fund, are likely to be the top P/E investors in the upcoming share sale by this cash-starved lender. But would it be able to raise an investment of about $350-400 million from them is yet to be seen.
Our experts feel, for now, it is best to stay away from the private lender’s scrip. Even though valuation may look attractive, especially to those investors who prefer investing when the market or company is in its bear periods. Nevertheless, it shouldn’t be the only object to take into consideration. There seems to be no sign of improvement in the number-crunching of this bank, so our advice is to wait and watch before buying its stock. This private money lender has lost its trust and the revival would be a long way.
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