I have been covering Yes Bank stock for over 2 years now, to be precise since RBI rejected the renewal of Rana Kapoor's tenure as bank CEO back in August 2018. The stock was trading at an all-time high of 404 since then the stock has plummeted 96% with chances of it going down even further. RBI has put the bank on moratorium for 1 month, the board is superseded by the RBI and there's no clear vision in front of the depositors, investors, and employees alike. So how did we get here? what went wrong? whats the future ahead (if any)?
The decline started a couple of years before when Rana Kapoor the man who built the bank became reckless about the business and the bank was saying yes to anyone and everyone wanting loan the eligibility criteria and other facts and figures came later. If the business was fit and fine the loan would be approved immediately if not then Rana Kapoor would charge hefty processing fees and then approve the loan. Many times Rana Kapoor would himself have a meeting with business owners who have been rejected by other banks and offer them a loan. The good thing was the Banks balance sheet kept growing and the fees looked good on the books. It wasn't all bad, Yes Bank had a knack in recovering those dues some voluntarily and some by other means but some couldn't even if they wanted to and slowly they started piling up that was just the start of internal issues after all this the real problem surfaced.
Blame it on whoever you want but the economy started declining qtr by qtr and businesses started to feel the heat of liquidity crunch. RBI was closely watching as it always does, and so they decided not to let Yes Bank slip away and rejected Rana Kapoor's reappointment as bank CEO. This was the first red flag for the market. There were two candidates in lead for the post. Rajat Monga and Ravneet Gill, former was the CFO and good friend of Rana Kapoor while Mr. Gill was CEO of Deutsch Bank India operations. The board chose Mr. Gill an outsider a veteran banker still the stock went down from 230 to 141 in February 2019, because the market was worried about something else. RBI was assessing the bank's loan book and the report came out with no divergence meaning RBI did not find any disparity in bad loans declared by Yes Bank the stock jumped 30% and in the following month, it went all the way up to 278. All bad things seemed like thing of the past with a new captain at the helm and clearance from RBI the bank went full steam ahead but as we all know tables turned again this time because of external factors.
IL&FS one of the leading NBFC of India filed for bankruptcy in October 2018, it had an asset book worth 1.0 lakh crore meaning it had given loans of that magnitude, and when the company collapsed it impacted many sectors, regions and brought down some other institutions as well. The biggest impact it had was on the Reality sector likes of DHFL, Jet Airways, Coffee Day, Altico Housing finance all the companies who had taken a loan from Yes Bank got into trouble and the already big NPA problem became even bigger. To quote Ravneet Gill he said in an interview "Every torpedo fired at us, hit us" to counter this problem once and for all Mr. Gill in his first-ever quarterly results after taking charge declared 1.5 thousand crore loss his strategy was to put all cards on the table and going forward with a clean slate. This strategy is called the kitchen sink, not only did it spooked the investors but it brought down the Tier 1 Equity Capital Adequacy ratio of the bank to 8%, the borderline. As per RBI rule, any bank whose Tier 1 ratio falls below 8%, RBI can revoke their license.
IL&FS one of the leading NBFC of India filed for bankruptcy in October 2018, it had an asset book worth 1.0 lakh crore meaning it had given loans of that magnitude, and when the company collapsed it impacted many sectors, regions and brought down some other institutions as well. The biggest impact it had was on the Reality sector likes of DHFL, Jet Airways, Coffee Day, Altico Housing finance all the companies who had taken a loan from Yes Bank got into trouble and the already big NPA problem became even bigger. To quote Ravneet Gill he said in an interview "Every torpedo fired at us, hit us" to counter this problem once and for all Mr. Gill in his first-ever quarterly results after taking charge declared 1.5 thousand crore loss his strategy was to put all cards on the table and going forward with a clean slate. This strategy is called the kitchen sink, not only did it spooked the investors but it brought down the Tier 1 Equity Capital Adequacy ratio of the bank to 8%, the borderline. As per RBI rule, any bank whose Tier 1 ratio falls below 8%, RBI can revoke their license.
Raising capital became of paramount importance to the board, and they did raise 1930 crores through QIP mode from Mutual Funds but that was not enough, to sustain the problem and to grow Yes Bank required close to 10-12 thousand crores of capital. That was difficult, firstly rules and regulations must be followed. Raising 10 thousand crores means diluting shareholding pattern and any new investor would hold more than 10% and RBI restricts such transaction the investor must pass RBI's fit and fitness test to own that much in a bank. There are certain regulations in regards to foreign investors, RBI has very strict rules for FPI's. Domestic investors were not ready to put such huge amounts because of the slowing of the economy and the limited amount of institutions and investors who were showing interest in the bank either had certain conditions or offers from investors like Erwin Singh Braich were rejected by the bank itself as it was not sure of the Mr. Braich qualifying the RBI test.
While all this was happening time was running out, depositors were losing trust, investors were losing patience and when the stock came down to 70, Rana Kapoors shares in Yes Bank were sold as they were pledged. Reliance Nippon Asset Management Company sold those shares to pay some due loans. On multiple occasions, Mr. Kapoor had termed his shares of Yes Bank as diamonds and he never wanted to sell them so as the news broke out the shares went further down. Yes Bank held 3 board meetings in December, January, and February but could not finalize capital raising. It even got shareholder's approval in EGM but still, no relief plan was in sight, no credible investor at home or abroad was ready to get along. It even postponed the quarterly results citing management was busy with capital raising plans.
RBI being a bankers bank had to safeguard the funds of depositors had no option but to step in and take a more active role in the revival plan with just 1 week left to quarterly results and no action plan insight they put the bank in moratorium period till 3rd April. This means the bank can not make a decision or perform any activity without RBI approval for one month. This is a very good action taken by the RBI, now they are in talks with SBI to bring a revival plan in action. SBI board has already given go ahead with investment in Yes Bank, even though the Banking Act restricts one bank holding into another bank up to 9.99% it would interesting to see how they tackle this problem. The government must help troubled institutions if an institution like Yes Bank fails then the second line or third line impact would bring significant damage to the already stressed economy. RBI has already given an end date to this moratorium period and the governor while speaking to media said we would come out with a revival plan before 3rd April.
The stock went down to 5.65 Rs but recovered and closed 56% below at 16.35 technically speaking that's a turnaround of 250% within a few hours. Yes Bank has millions of depositors, 12000 plus employees, and 2.5 lakh crore worth of assets so the bank would never fail or go bankrupt worst-case scenario would be merging it with some other bank but Shankitanta Das has said clearly that Yes Bank will not be merged with any PSU at all. There is no reason to panic just being patient and trusting the world's least worse central bank (according to foreign media) would do its job right can get us out of this trouble unharmed.
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