BackWhy Yes Bank has suddenly become the sixth largest bank by market cap
Yes Bank is now being valued 75% higher than the market cap of larger peer IndusInd BankThe rally in the shares is due to the scarcity in the bank’s stock after a regulatory diktat
PremiumOn 6 March, the market value of Yes Bank Ltd fell to as low as ₹1,441 crore in intraday trading. It then seemed like there is no hope left for the private sector lender.
However, within a week, a group of lenders cobbled together by the government and the Reserve Bank of India said they will invest ₹10,000 crore in the bank at ₹10 per share, valuing it at ₹12,550 crore.
In just the next two trading sessions, Yes Bank shares zoomed to ₹58.65, with the lender now valued at as much as ₹73,600 crore, far higher than bigger peer IndusInd Bank Ltd, which is valued at ₹42,000 crore.
While IndusInd trades at 1.3 times its adjusted book value, Yes Bank is now being valued at about 5 times. This is based on FY20 estimates of Emkay Global Financial Services Ltd. In fact, analysts at Emkay have a target a price of only ₹4 for the Yes bank stock.
The private sector lender is also being valued higher than the combined worth of Bank of Baroda, Punjab National Bank, Bank of India and Union Bank of India.
This isn’t a case of irrational exuberance. The rally is being caused by a scarcity of shares after a regulatory diktat that 75% of equity held by existing shareholders will be locked-in. As such, the free float in Yes Bank fell from about 2.55 billion shares last Friday to about 638 million shares at present.
As of last Friday, when the lock-in kicked in, futures positions of 245 million shares were outstanding. Those with short positions need to deliver these shares on expiry date and have little option but to buy shares from the spot market, as physical settlement of trades is now mandatory. The outstanding position has reduced a bit in the past two trading sessions, but is still around 200 million shares.
Given the scarcity created by the lock-in, shares aren’t easily available. In the past two trading sessions, about 70 million shares changed hands in terms of actual delivery-based trades on the National Stock Exchange and BSE.
As such, it may be a while before shorts are able to cover their positions. This means that Yes Bank shares may continue to trade at lofty valuations for some more time.
However, once this technical quirk is resolved, Yes Bank shares may quickly return to where they really belong. Besides, the lenders who bought 10 billion shares in all can also sell 25% of their holding at some point, though they are unlikely to do so immediately. Once they sell their holding, it will increase the float considerably and cause prices to adjust as well. There are, of course, fundamental factors. A flight of deposits can also weigh on valuations.
However, until the technical factors are resolved and the fundamentals take over, investors should note that dealing in Yes Bank shares is like playing with fire.
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