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JP Morgan has cut the target price on shares of Yes Bank to  ₹1
JP Morgan has cut the target price on shares of Yes Bank to 1

JP Morgan cuts Yes Bank target price to 1

  • Investors will likely want the bank to be acquired at near zero value
  • It remained to be seen if additional tier-1 capital will be called for dilution

NEW DELHI: Global brokerage firm JP Morgan has cut the target price on shares of Yes Bank to 1 as investors are likely to acquire stake in the bank at near zero value to account for risks associated with the stress book and loss of deposits.

"Yes Bank’s quasi sovereign bailout (by SBI/LIC) we believe is a bond holder / depositor bailout and not an equity one, and hence today’s rally in the stock (Yes +26% vs. Nifty flat) is unjustified," the brokerage said.

Shares of the private lender today ended 26% higher on the National Stock Exchange even as the benchmark Nifty ended largely flat.

The global brokerage's write down of the private lender's shares came on reports that State Bank of India (SBI) and Life Insurance Corporation of India (LIC) may form a consortium to pick up a stake in the bank. People familiar with the development told Mint the bank is unlikely to be nationalized.

"The new capital will likely come in at a steep discount to current share price, as forced 'bailout' investors will likely want a large cut for equity holders," JP Morgan said.

The brokerage firm said it remained to be seen if additional tier-1 capital at the bank will be called for dilution as such a move could have implications for future similar issuances by private banks.

Yes Bank is yet to report its December quarter financials and it is expected the bank will need to be recapitalized at nominal equity value and could test dilution of additional tier-I capital.

JP Morgan also believed that implications for State Bank of India which has been reportedly asked to bail out Yes Bank are "incrementally negative for its valuations as it sets a precedent for nationalization of any future private losses".

This has been captured in the sharp discount at which the stock traded against its private peers. SBI shares closed 0.8% higher on the NSE today.

"We believe a crystallization of such an event effectively makes the discount sticky for a long time...It remains to be seen if SBI/LIC will put up the recap money required."

Yes Bank has been struggling to find investors to raise funds worth $2 billion despite several efforts. The bank has been in trouble since its founder and former chief executive officer (CEO) Rana Kapoor was denied extension by the Reserve Bank of India in 2018 owing to corporate governance issues and under-reporting of bad loans.

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