Yes Bank Funding Delay Prompts Brokerages To Question Lender’s Future

Yes Bank Ltd.’s inability to close a $2 billion fundraise at its board meeting on Tuesday has prompted at least two large brokerages to raise questions about the future of the lender.

After a five hour meeting, the board said it will “favourably” consider a $500 million offer from Citax Holdings and Citax Investment Group. A $1.2-billion binding offer from Canada’s Erwin Singh Braich and SPGP Holdings is still under discussion, the board said, without clarifying whether it will approve the offer.

Together, the two bids accounted for 85 percent of the $2 billion in offers the board had detailed last month.

With fund raising continuing to prove difficult, at least two large brokerages have questioned whether the bank can continue as a standalone ‘going concern’.

The unavailability of capital “raises questions on the going-concern status of the bank,” said Nomura Global Markets Research in its note dated Dec.11. Risks to the ‘going concern’ status of the bank will likely have an implication on the sector, it added. Macquarie Research in a note titled ‘Nationalisation Looms?’ said, “In our view, if the bank is unable to raise money in the next six months, it poses a grave danger to the financial system”.

Shares of Yes Bank fell more than 8 percent in morning trade in response to the delay in fundraising.

These are the key points highlighted by brokerages this morning.

Nomura

• Board outcome on bids is a negative development as the $1.2 billion bid from Erwin Singh Braich is unlikely to go through.
• Doubt whether $800 million would also go through as availability of $1.2 billion could have been the condition on raising a large part of the required capital.
• Provisioning by the bank for stressed assets could be front-ended. With Common Equity Tier-1 ratio of 8.7 percent, large provisioning without capital infusion could lead to Yes Bank breaching the regulatory capital limits soon.
• Unavailability of capital raises questions over going concern status of the bank.
• There are likely to be few merger options, excluding State Bank of India.
• Retain neutral, target Rs 63/share

Macquarie

According to Macquarie, the fundraising plan has left many questions unanswered:

• Why did the board even decide to announce they have a binding bid from Erwin Singh Braich?
• Should the management not have done due diligence before announcing the bid?
• What is the source of money of Erwin Singh Braich?
• What is the probability of Reserve Bank of India approving such an investor with a questionable track record?
• What about Citax Investments where there isn’t much information available in public domain?
• Why is the board even considering raising money from Erwin Braich and still indecisive?
• Bank would need $2.5-3 billion over next 12-18 months.
• If the bank is unable to raise money in the next six months, it poses a grave danger to the financial system.
• Contagion risk of a bank collapsing far higher than an NBFC collapsing.
• Maintain underperform with a target price of Rs 50 per share.

IDFC Securities

• Don’t know if Citax will pass the Reserve Bank of India’s “fit and proper test”.
• Given that nothing definitive has come out regarding the bank’s capital raise and many investors from the list have backed out, we reiterate ‘Underperformer’.
• The uncertainty and delay in capital raise will weigh on the bank’s ability to provide for bad loans, raise and retain deposits, and could also lead to further credit rating downgrades.
• Key monitorables for the bank include date of next board meeting, RBI approval for Citax, slippages and level of outstanding deposits in the third quarter.