Yes Bank was taken over by the central bank in 2020 and sold to a consortium of banks after a dramatic rise in toxic assets.

Yes Bank was taken over by the central bank in 2020 and sold to a consortium of banks after a dramatic rise in toxic assets.

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Three years ago, a bunch of peer banks brought Yes Bank back from the brink of collapse through a rescue plan. The plan involved an infusion of Rs 10,000 crore into the troubled private-sector lender by eight financial entities at Rs 10 per share.

The bank’s capital was shored up to the minimum regulatory levels and the lender began to fix its balance sheet in earnest.

But two of the conditions of the rescue plan have come back to haunt Yes Bank’s investors. The plan had mandated that 75 percent of the bank’s equity will be under a three-year lock-in from the commencement of the reconstruction scheme.

End of lock-in period may lead to selling pressure

What this means is that the rescue investors, led by the State Bank of India (SBI), have to hold 75 percent stake for three years. This lock-in will end on March 13 and analysts expect a large supply of the bank’s shares to hit the counters.

According to a Reuters report, SBI is looking to bring down its stake once the lock-in period ends.

“The end of the lock-in period is a big overhang for the stock and it is very difficult to make a call right now. There is going to be a lot of selling pressure in the coming months,” said Ashutosh Mishra, head of research for institutional equities, Ashika Stock Broking Ltd.

Also read: SBI may look to cut Yes Bank stake once lock-in ends: Sources

Additional Tier-1 bonds additional trouble

Yet another trouble for the bank is the write-off of Additional Tier-1 (AT-1) bonds. The rescue plan mandated that AT-1 bonds be written off as part of the capital reconstruction of Yes Bank. But investors in such bonds have contested this on the premise that these bonds were mis-sold by the banks to them. Also, the move to protect the equity value and write off the bonds as part of the bailout was odd.

The Supreme Court (SC) is set to hear the matter on March 28. For now, the apex court has upheld a High Court order that put a hold on the bond write-off.

The impact of any decision on the bond write-off would be significant. If the court orders the bank to pay up the bondholders, Yes Bank will face an outflow of Rs 8,400 crore. This uncertainty is the heaviest burden weighing on the stock now, which is down 21 percent since January 2023. Note that the fall in the broader Nifty50 index has been a little over 2 percent during the same period. Also, the sector index has lost just 3.6 percent.

Analysts believe that these are short-term issues pressuring the stock. What about the patient investor looking at a horizon of more than 3-5 years? Does Yes Bank offer a compelling reason to stick around or even enter?

Also read: Yes Bank AT1 case: SC puts on hold Bombay HC order quashing write-off of bonds

Still a no

At the time of its rescue, nearly a quarter of Yes Bank’s loan book had turned bad, and its capital had collapsed below regulatory minimum levels. Over the past three years, the bank has managed to bring down its bad loan pile to 13 percent and beefed up its provisions.

The lender also turned profitable within three quarters after the rescue. Its loan book showed a 10 percent growth for Q3 of FY23, and deposits too are expanding at a reasonable pace. In the third quarter of FY23, Yes Bank sold bad loans worth Rs 8,046 crore to an asset reconstruction company (ARC), which brought down the gross bad loan ratio dramatically to 2 percent.

That said, the bank’s return ratios are wanting, according to analysts. Granted, the return on assets has improved from negative to 0.4 percent as of FY22. When stacked up against other similar-sized peers, Yes Bank’s valuation does not add up.

Anand Dama, banking analyst at Emkay Global Financial Services Ltd, believes that return ratios do not justify valuations. “The bank may be coming out of its troubles but if we look at ROA and RoE, valuations are not worth it. There are many other options for investors in the banking sector now,” he said. The brokerage has a sell rating on the stock.

In fact, most analysts have a 'sell' or an 'underperform' rating on the stock and are not in a hurry to rerate it. At the current level, Yes Bank’s shares trade at 1.2 times estimated book value for FY24. “The recent drop in bank share is giving a good entry point to quality names. Picking Yes Bank is not a good decision, especially when there are unresolved issues like the bond write-off,” said an analyst requesting anonymity.

Shares of peer RBL Bank trade at a discount to its estimated book value for FY24 while those of IndusInd Bank trade at 1.4 times. The return on assets of these two lenders is superior to Yes Bank. Analysts believe that investors would be better off by opting other lenders such as these.

Yes Bank’s balance sheet has healed from its past wounds. But investors have little patience to spare at the time of volatility. Even if the bank’s capital weathers the exit of its rescuers, getting the confidence of investors is still a tall order.

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