YES Bank under a month-long moratorium

The Reserve Bank of India (RBI) on Thursday superseded the board of YES Bank and imposed a moratorium on withdrawals from the private sector lender at ₹50,000 for about a month, saying there have been serious governance issues and a deterioration of assets.

The troubled bank’s stock closed at ₹36.85 apiece on the BSE on Thursday; it was the day’s top gainer with a jump of 25.77%, or ₹7.55 a share, over its previous day close. There were unconfirmed news reports that India’s fourth-largest private bank was being taken over by public sector lender State Bank of India (SBI).

Around 2.17 pm yesterday, YES Bank clarified to the stock exchanges about its ignorance of any such development, and said it had no communication from the RBI, any government or regulatory authorities, or from SBI. However, that did not prevent investors from hitting the counter. The stock jumped 29.35% to touch its day’s high of ₹37.9 a share.

The frenzy was also evident from the traded quantity of the bank’s shares. Against the two-week average traded quantity of 12.18 million shares, the day saw trade volume jump more than three times to 43.38 million shares. Further, over 5.87 million shares were traded for delivery, almost thrice the two-week average of 2.03 million shares.

After the markets closed, further news trickled in that SBI and Life Insurance Corporation of India (LIC) were buying 24.5% stake each of YES Bank. On its part, SBI clarified to stock exchanges that while no negotiations have taken place, the matter was discussed at the central board meet of the bank on March 5. “An in-principle approval has been given by the board to explore investment opportunity in the bank,” SBI’s exchange communication said.

However, the biggest ‘confirmed’ blow came in the form of a gazette notification from the ministry of finance, which was issued by the banking division of the ministry’s department of financial services.

According to the gazette notification, the government, after considering an application made by the RBI, had put out an order of moratorium on YES Bank for a period of one month, till April 3. On its part, the central bank issued a notification where it conveyed that it has, in consultation with the central government, superseded the board of directors of YES Bank for a period of 30 days “owing to a serious deterioration in the financial position of the bank.”

The RBI said that “this has been done to quickly restore depositors’ confidence in the bank, including by putting in place a scheme for reconstruction or amalgamation.” Exercising its power under the Banking Regulation Act, 1949, the RBI also appointed Prashant Kumar, ex-deputy managing director and chief finance officer of SBI, as the administrator of YES Bank.

An action of this magnitude is not new when it comes to private banks in India. While there have been instances of regulator forced mergers of private banks in the past, an interesting example is the Global Trust Bank (GTB), promoted by Ramesh Geli in the 1990s. In 2004, a similar moratorium of three months (July 24-October 23) was imposed on GTB by the RBI; GTB depositors were permitted to withdraw up to ₹10,000 during that period.

In yesterday’s notification, the RBI said; “The financial position of YES Bank has undergone a steady decline, largely due to the inability of the bank to raise capital to address potential loan losses and resultant downgrades, triggering invocation of bond covenants by investors, and withdrawal of deposits.”

RBI added that YES Bank has experienced serious governance issues and practices in recent years, which have led to a steady decline of the bank. The central bank said it has been in constant engagement with the bank’s management to find ways to strengthen its balance sheet and liquidity. “The bank management had indicated to the RBI that it was in talks with various investors and they were likely to be successful,” the central bank said.

According to the RBI, YES Bank was also engaged with a few private equity firms for exploring opportunities to infuse capital as per a February filing with the stock exchange. “These investors did hold discussions with senior officials of the Reserve Bank but for various reasons eventually did not infuse any capital,” RBI said. “Since a bank and market-led revival is a preferred option over a regulatory restructuring, the Reserve Bank made all efforts to facilitate such a process and gave adequate opportunity to the bank’s management to draw up a credible revival plan, which did not materialise. In the meantime, the bank was facing regular outflow of liquidity,” the central bank added.

The RBI, after taking into consideration these developments, decided that in the absence of a credible revival plan, and in public interest, and the interest of the bank’s depositors, it had no alternative but to apply to the government for imposing a moratorium. “The Reserve Bank assures the depositors of the bank that their interest will be fully protected and there is no need to panic,” the central bank said.

Thursday was generally eventful but ended with crippling the private bank’s most unsuspecting stakeholders: its depositors. The stakeholders and the shareholders have a lot more to worry from here. While the immediate possibility is that the YES Bank scrip could be moved to the T2T (trade-to-trade) segment, where shares can be traded compulsorily for delivery and cannot be traded intra-day.

Beyond the T2T fear, the even major fear is the intrinsic value of the shares after the RBI imposed the moratorium. In a research note from Macquarie Securities, analysts wrote that SBI and other PSU bank need to buy the private bank at ₹1. It explained that YES Bank has an approximate net worth of ₹25,000 crore, and its below investment grade book (BB and below) is at ₹30,000 crore, and BBB book is at about ₹50,000 crore. “If we assume a substantial proportion of BB and below book is wiped off and say 10-15% of BBB book is to be written off, it implies the current net worth of the bank is zero (after factoring in 25% tax benefits),” the Macquarie analysts noted.

In a separate report, JPMorgan downgraded their target price on the YES Bank stock from ₹55 to just ₹1 a share at the end of March 2021. “YES Bank’s quasi-sovereign bailout (by SBI/LIC) we believe is a bondholder/depositor bailout and not an equity one, and hence today’s rally in the stock (YES +26% vs. Nifty flat) is unjustified,” analysts said.

“The new capital will likely come in at a steep discount to the current share price, as forced “bailout” investors will likely want a large cut for equity holders and it remains to be seen if additional-tier 1 (AT1) at the bank will be called for dilution, as such a move could have implications for future similar issuances by private banks,” the note said.