Ousted co-founder and former head Rana Kapoor had said that he would never sell Yes Bank shares because they were like diamonds.

His successor Ravneet Gill’s clean-up drive has made it obvious that the bank’s shine wasn’t anything like the diamond it was likened to.

The private lender’s 10% loan growth for the June quarter is a shadow of its past record of 45-50%. Besides, the toxic levels of the book have only risen as Gill’s clean-up drive continues to reveal troubled accounts.

For the June quarter, the lender reported a 91% fall in its net profit, with core income growing at just about 2.8% from a year ago. A big hit to profit was also due to a one-time provision of 1,109 crore towards mark-to-market hit on its investments.

Gross bad loans are now 5.01% of the bank’s loan book, a massive increase from 1.3% a year ago.

A slight relief is that the bank had made contingency provisions worth 2,100 crore in the March quarter, which it ended up using in the June quarter as bad loans surged. It still has 700 crore contingency provisioning left.

Another relief is that all of the fresh slippages seems to have come from the management’s watch list. This means that the bank was not blindsided by a sudden surge in delinquencies.


Even so, the bank’s insurance against risk through a provision coverage ratio is abysmally low at 43%.

And this is where Gill’s real challenge lies. The bank’s capital has already depleted due to provisioning. If the lender chooses to ratchet up the coverage ratio to industry levels, its current capital would drop sharply.

In a post-earnings conference call, the management said the bank needs capital to grow and the internal profits it generates would be enough to cover risk of delinquencies.

Yes Bank’s common equity tier-I ratio was 8% as of end- June and the overall adequacy was 15.6%. The regulator has set the deadline to meet a common equity tier-1 ratio of 8% by March 2020. Unless the talks the bank is having with various investors fructifies into funding, it would have a tough time to maintain the already low loan growth levels.

Yes Bank’s valuations drew their strength from its growth story. The fact that the stock now trades at a discount to its estimate book value for FY21 shows that investors have priced in the collapse in growth. Of course, there are also questions on whether the book value is what it appears to be. For it to be re-rated, the lender needs to raise capital quickly.

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