A stitch in time saves nine. Private sector lender Yes Bank Ltd would have realized the importance of being timely.
The bank has found itself in an unfavourable position now because it was unsuccessful in raising capital when funds were needed the most.
At the beginning of 2019, when the new management indicated it would clean up the balance sheet, it was obvious that provisions would require capital. As the lender began labelling dubious loans as toxic and providing against them, its capital began to deplete.
Analysts raised alarm over the depleting capital and Yes Bank had said in April that it would raise close to $1 billion ( ₹7,100 crore) soon.
The bank’s new chief Ravneet Gill said in May that talks are on with marquee investors. But fundraising was nowhere in sight except for statements by the management.
It took Yes Bank four months to finally raise a fraction of its originally intended capital. The lender raised ₹1,930 crore through a qualified institutional placement earlier this week. The issue price was fixed at ₹83.55 apiece and a little over two million fresh shares were issued.
But this money is surely not enough for Yes Bank and it needs to raise more. In a note in July, Jefferies India Pvt. Ltd estimated the bank would need $3-4 billion ( ₹20,000-25,000 crore) over three years. That means more dilution awaits investors down the road. Ergo, the tide is unlikely to turn favourable for the stock even in the coming months.
Analysts at Edelweiss Securities Ltd noted that even if Yes Bank raises the total $1 billion, its Common Equity Tier-1 (CET-1) ratio would not cross 11%. “Moreover, the bank’s target of greater than 20% growth will entail imminent further dilutions," they said in a note dated 18 July.
As of June end, the lender’s CET-1 ratio was 8% and total capital adequacy ratio at 15.7%. By March 2020, minimum regulatory requirement for banks is 8% of CET-1.
It is clear that Yes Bank has no option but to raise more capital. That said, the lender needs to simultaneously fix its balance sheet.
A large contribution to the disastrous drop in the stock has been the bank’s results that showed toxic loans had increased and provisions were unlikely to reduce. Yes Bank has indicated close to ₹30,000 crore worth of loans as stressed and most likely to slip. It has exposure towards troubled sectors like real estate and non-bank lenders.
Conditions are not helpful for Yes Bank to reduce stress on its book. Resolutions for big insolvency cases are far from visible, the liquidity crunch and lending freeze among non-bank lenders hasn’t reduced, and the deepening slowdown in the economy entails a benign outlook for loan growth.
Until then, the Yes Bank stock is likely to be under pressure, although it trades at a discount to its estimated book value for FY21.