Introducing Yes Bank of India, the demanding monkey on SBI’s back
State Bank of India to buy 49% in Yes Bank through an initial investment of ₹2,450 croreYes Bank’s immediate requirement for capital could be ₹20,000-22,000 crore
State Bank of India (SBI), the country’s largest lender, is understandably being praised for coming to the rescue of Yes Bank Ltd’s depositors and lenders, while also bringing some stability to the financial system in the process.
However, it’s now time for SBI’s shareholders to count the cost. The initial investment will be ₹2,450 crore, but the commitment could go up to ₹11,000 crore. “Our minimum investment over a period of time is 26% of ₹20,000 crore to ₹22,000 crore. So, ₹5,000 odd crore. If it is 49%, double the figure" SBI chairman Rajnish Kumar said at a press conference on Saturday.
For SBI to make only the minimum possible investment, other investors including private sector lenders would have to do their maximum to bail out Yes Bank. As that is highly unlikely, it is fair to assume for now that SBI will be bringing in 49% of the total capital requirement.
Getting other investors to put in the rest of the money could still be a challenge, but analysts believe that SBI’s presence will give comfort. That SBI will hang around for at least three years with a minimum 26% stake is an added bonus.
“We have been approached by some potential investors," said Kumar.
“The SBI name will draw investors but it is not going to be a walk in the park," said an analyst at a broking firm requesting anonymity.
Yes Bank’s financial metrics are a big mess. The extent of the hole is unknown as the lender’s latest financials are five months old. “SBI needs to clean up the bank’s balance sheet. It is sure to have done some due diligence and they would know how big the hole is," said Abizer Diwanji, head of financial services at EY India.
Yes Bank also has a large pool of stressed loans with high potential to turn bad. The need for capital is unlikely to reduce in the near term. Analysts at Morgan Stanley have a base case scenario where Yes Bank’s capital requirement is ₹21,800 crore. This runs on the assumption that 80% of the stressed pool turns bad. This is the survival capital.
Nomura Financial Advisory and Securities (India) Pvt. Ltd has warned of continued challenges at Yes Bank irrespective of the resolution plan. “There is a risk of deposit outflows when limits are withdrawn," Nomura analysts wrote in a note to clients. As such, the need for capital infusion may be more than what is being anticipated currently,
Some analysts believe that SBI’s investment will end up making money, as it sets Yes Bank’s house in order and helps it eventually grow. However, until then, it will have to keep pumping in money little by little to keep the troubled bank afloat. SBI shareholders are likely to price this risk in when trading resumes on Monday.
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