Stakeholders in YES Bank were keenly waiting for March 14 (Saturday), the cut-off date which the bank had intimated on February 12, to make public its unaudited financial results for nine months and the quarter ended December 2019.

A media briefing scheduled at 11.45 a.m. on Saturday was abruptly cancelled and those rushing to the venue thought that it was in light of coronavirus fears. But, when an analyst teleconference, scheduled at 2.00 p.m., was cancelled, it became clear that the Reserve Bank of India (RBI)-appointed administrator Prashant Kumar, former deputy managing director and chief finance officer of State Bank of India (SBI), had a tough job in hand.

YES Bank uploaded its results on the stock exchanges at 11.16 p.m. following Kumar taking note of the bank’s limited review report, submitted by its statutory auditor–BSR & Co. at 10.30 p.m.

Early in its report, BSR & Co. raised ‘material uncertainty related to going concern’ citing the bank having incurred a quarterly loss of ₹18,564.25 crore, and loss of ₹19,097.78 crore in the nine-month period ended December 2019. “During [both] the periods, there have also been a significant decline in the bank’s deposit base; an increase in non-performing asset (NPA) ratios, resulting in breach of loan covenants on its foreign currency debt; and credit rating downgrades, resulting in partial prepayment of foreign currency debt linked to external credit rating,” the statutory auditors highlighted.

BSR & Co. also highlighted that during the periods under review, YES Bank had also breached the minimum statutory liquidity ratio (SLR), liquidity coverage ratio (LCR) requirements; also the RBI mandated common equity (CET-1) ratio stood at 0.60% compared to the requirement of 7.375%.

“The breach of the CET-1 requirement for the quarter ended December 2019 was also impacted by the bank’s decision to enhance its provision coverage ratio (PCR) on a prudent basis on its NPA loans over and above the RBI loan-level provisioning requirements,” BSR & Co. added. These factors apart, the statutory auditor highlighted the developments around moratorium superseding of YES Bank’s board.

“The above indicators of financial stress and actions taken by the RBI may have an impact on the depositor confidence and withdrawal behaviour, which is uncertain,” BSR & Co. warned. “These conditions, along with other matters as stated in the said note, indicate that a material uncertainty exists that may cast significant doubt on the bank’s ability to continue as a going concern.”

Before diving into YES Bank’s unprecedented losses, the shrinkage in its deposits’ base is worth a watch. Compared to ₹2,22,758 crore in December 2018, total deposits fell by an annual 25.59% to ₹1,65,755 crore; in absolute value terms, the decline was ₹57,003 crore. Also, on a quarter-on-quarter basis, deposits fell 20.88% (₹43,742 crore)–from ₹2,09,497 crore in September. The result’s fine print also highlighted that as on March 5, the eve of moratorium impositions , YES Bank’s deposit base saw a further reduction to around ₹1,37,506 crore. Compared to December 2019, deposit base fell by over ₹28,249 crore, or 17.04%, in absolute terms in a little over two months.

Now, let’s come to the bank’s record NPAs. At ₹40,709.2 crore at the end of December 2019, gross NPAs grew 57.91% from ₹17,134.41 crore at the end of September last year. Compared to YES Bank’s ₹5,158.62 crore and ₹7,882.56 crore gross NPA reported for the quarter ended December 2018 and full of FY19, the December 2019 quarter value was a jump of over 7.89 times and 5.16 times, respectively. In terms of percentage, gross NPA stood at 18.87%, 7.39%, and 2.10% for the quarters ended December 2019, September 2019, and December 2018, respectively. The gross NPA ratio for FY19 was just 3.22%.

Similarly, YES Bank’s net NPA in the December quarter at ₹11,114.72 crore is 13.91% higher than the ₹9,757.2 crore it reported in the previous quarter. And, compared to the quarter ended December 2018 (net NPA: ₹2,876.35 crore) and FY19 (net NPA: ₹4,484.85 crore), the rise in the December 2019 quarter exceeds 3.86 times and 2.47 times, respectively. As percentages, YES Bank’s net NPA ratio was recorded at 5.97%, 4.35% and 1.18% for the quarters ended December 2019, September 2019, and December 2018, respectively. During FY19, YES Bank’s net NPA ratio was just 1.86%.

Now, let’s look at what made YES Bank after such a humungous loss in the December quarter. First and foremost, the bank saw 46% and 52.5% decline in its total net income over the last quarter and the same quarter last year, respectively. And, the bank’s provisions jumped 18.53 times (+ 1,753.4%) on an annual basis, from ₹1,336 crore in December 2018 to ₹24,766 crore in December 2019; compared to September 2019, provisioning grew 450.29 times (+ 4,402.91%) from just ₹550 crore.

Going by the notes to accounts, slippages in NPAs were considered beyond December 2019, up to March 14, which resulted in recognition of additional NPA worth ₹5,150.2 crore and related provisioning requirements of ₹772.5 crore. “Additionally, considering the economic environment and the significant increase in NPAs in the quarter ended December 2019, the bank has decided, on a prudent basis, to enhance its provision coverage ratio on its NPA loans over and above the RBI loan-level provisioning requirements,” the note read.

“As a result, the bank recognised additional provisions of ₹15,422 crore in the quarter ended December 2019 and enhanced its PCR from 43.1% on September 30, 2019, to 72.7% on December 31, 2019,” the accounting note added. “This decision is also in line with the bank’s discussions with the RBI during the quarter.”

The bank’s loss figure for the quarter could have been even bigger had the bank not exercised the option permitted under section 115BAA of the Income Tax Act, 1961, as introduced by the Taxation Laws (Amendment) Ordinance, 2019. According to the prescribed amendments, YES Bank recognised provision for income tax and re-measured its deferred tax asset and also the annual effective income tax rate. “The rate of income tax is changed from 34.944 to 25.168,” said a note to that effect.

Interestingly, in a separate note, the bank highlighted that “based on the financial projections prepared by the bank and approved by the administrator, the bank has assessed that there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. “The bank expects to have a taxable profit for the year ending March 31, 2020,” BSR & Co. said in its report.

Finally, in an investor presentation filed to stock exchanges at 12.49 a.m. on March 15 (Sunday), YES Bank mentioned that focus on deposit mobilisation was its very first of the key themes for the near future. That followed focus on retail loans, including MSME, accelerating resolutions of stressed assets, cost optimisation and maintaining digital leadership would be its other focus areas.

The biggest challenge for YES Bank, as well its new set of investors, is the run on the bank by depositors. As pointed earlier, YES Bank’s deposits base has reduced from ₹2.23 lakh crore in December 2018 to ₹2.09 lakh crore at end-September 2019, to ₹1.66 lakh crore at end-December 2019, and finally at ₹1.38 lakh crore on March 5. “The question is who will give deposits to YES Bank,” says an analyst, adding “deposits are the raw materials which run a bank while capital is secondary”.

For now, YES Bank has received letters of commitments/offers to invest from investors amounting to ₹10,000 crore as of March 14, 2020. Additionally, based on the reconstruction scheme, contractual terms, and legal assessment, the bank believes additional tier 1 (AT-1) bonds amounting to ₹8,695 crore can be utilised to enhance the common equity of the bank. “The capital infusion and consideration of the AT-1 bonds is expected to improve the CET-1 ratio of the bank and enable it to meet the minimum requirements of the RBI,” BSR & Co. noted.

The statutory auditor’s report also highlighted that in the opinion of YES Bank, based on the financial projections prepared by the bank and approved by the administrator for the next two years, the proposed capital infusion, lines of liquidity provided by the RBI and the reconstruction scheme, the bank will be able to realise its assets (including its deferred tax asset) and discharge its liabilities in its normal course of business and hence the financial results have been prepared on a going concern basis. “The said assumption of going concern is dependent upon the degree of success of the final reconstruction scheme, the quantum of capital infused into the bank and the bank's ability to stabilise its deposit balances after withdrawal of moratorium by the RBI,” BSR & Co. noted further.

Clearly, Prashant Kumar has quite a task ahead of him. More so, his experience at SBI as the giant public sector bank’s chief finance officer will be more useful for the beleaguered YES Bank.

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