Yes Bank had once been a leading emerging corporate and retail bank, till it got caught in a series of issues. Violations by promoters, governance issues, accounting irregularities, and bad loans, amongst other problems marred the bank.
The stock went from its high of around Rs. 370 per share in July 2018, all the way down to Rs. 90 in July 2019, and further down to Rs. 12 in July 2020. Within two years, the bank’s stock had lost 97% of its value.
Every country’s government and central bank are particularly careful about the state of its banks. After all, people have faith in the banking system to save their life’s hard work, and any lapse in that trust can shake the very foundations of an economy.
Eventually, the government stepped in and a restructuring scheme was implemented with SBI and other lenders, under which the bank is implementing a resurrection.
Can Yes Bank once again stand on its feet, and gain back its glory?
Here are 5 reasons that might just make Yes Bank a lucrative investment option!
Restructuring Underway
In March 2020, the Government of India notified the “Yes Bank Limited Reconstruction Scheme 2020”
The implementation of the scheme triggered new strategic objectives for the bank including deposit growth, enhancing liquidity buffers, optimising costs, resurrecting governance frameworks, and resolving asset quality issues
With significant progress made in gaining stability, Yes Bank exited the reconstruction scheme and an alternate Board was formed in July 2022
Additionally, the RBI too withdrew its additional directors and the Board now consists of 6 independent directors, 2 non-independent directors, and the existing MD & CEO
New Management
Yes Bank has been stabilised and is beginning to turn around, thanks to the new leadership with Mr Prashant Kumar at the helm
They have leveraged the support of top shareholder banks and made changes to the governance and underwriting framework
Operationally, the bank has been focusing on granular advances led by loans in retail, SME and working capital financing and improvement in the CASA ratio
Asset Reconstruction
It recently completed the transfer of bad loans worth Rs. 48,000 crore in a deal with private equity firm J.C. Flowers
The transaction is the largest sale of stressed assets deal in India
To guarantee the bank a 23% recovery, JC Flowers has agreed to pay Rs 11,183 crore for the whole pool of stressed loans and the remaining will be held as Security Receipts (SRs)
The bank's Gross Non-Performing Assets (GNPA) ratio will drop from its present 12.89% to under 2% when the bulk of its stress pool is transferred to an Asset Reconstruction Company (ARC)
More Capital
The Board of Directors and shareholders of Yes Bank have approved a Rs 8,900 crore equity capital raise from funds affiliated with two global private equity investors, Carlyle and Advent International
This will be in the form of equity warrants, which, upon full conversion, will represent a 10.0% stake in the company
With this assurance and the growth capital infusion, Tier 1 capital will increase, and as the funding round was conducted around the book value, it is not expected to be dilutive to the book value
Metrics Improving
After clocking a ROA of 0.4% in FY22, the bank has been targeting 0.75% in FY23, and 1.0-1.5% in FY25
Resolution momentum continues with total recoveries and upgrades in 1HFY23 at Rs. 31 billion, well on track to achieve the FY23 guidance of Rs. 50 billion
Loan book growth has been lagging behind that of peers, but mainly due to a decline in the large corporate portfolio. However, new business formation remained strong, gaining traction through disbursements across retail, rural, SMEs and wholesale banking
The bank has been targeting retail growth of >25% in FY23, and wholesale growth of ~10%, translating to overall portfolio growth of 15%
Margins were up 20bps QoQ in 2QFY23 to 2.6% towards targeted levels of 2.75% for FY23
Net Interest Income grew 8% QoQ and 32% YoY in 2QFY23 given a 20bps expansion in NIMs to 2.6%
Net Interest Margins are expected to progress to 2.9% by 4QFY23, averaging at 2.75% for FY23
Higher margins are further supported by slippage (when a bank's loan becomes an NPA) normalisation, lower interest reversals, gradual deposit cost-benefit, and portfolio mix shift towards retail & SME
The Bottom Line 🧑💼
In March 2023, the three-year lock-in for 75% of the shares issued and bought before the RBI intervention will expire, significantly increasing the number of sellers. Therefore, February's earnings report for 3QFY23 is critical.
If the firm keeps moving in the direction it is, it will likely achieve success. Yes Bank's future appears bright under its new management, with the bank's bad debts now in the past and a surplus of cash.