Private sector lender Yes Bank reported ₹2,629 Crore net profit for the quarter ended March 31 as compared to ₹1,507 Crore loss during the same quarter of FY19. The bank had been placed under a moratorium by the RBI in March as part of a rescue plan for Yes Bank, backed by State Bank of India. Meanwhile a new management and board were appointed. So, this relative profit came as a result of the bank finally writing down additional tier-1 (AT1) bonds worth ₹8,415 Crore. The income from write-down of AT-1 bonds amounted up to ₹6,297 Crore, the bank said.
Consequentially, Shares of Yes Bank surged upwards to ₹31.6 on Thursday after the lender’s report came through. The stocks had increased 19.92% intraday at BSE, compared to the previous close of ₹26.35, after investors came to know about Yes Bank’s surprise net profit. Foe context, YES Bank’s stock prices opened with a loss of 2.09% at ₹25.80 on Thursday.
The Yes Bank stock had fallen 39.40% in this year, so far. But it had seen an unexpected rise of 24.28% in April. Although, the stock price is still way down, at 92.98%, from an all-time high of ₹404 that it touched on 20 August, 2018. In terms of metrics, however, the share is trading lower than its 5 day, 20 day, 50 day, 100 day and 200 day moving averages. The stock saw only buyers and no sellers in early trade today.
The bank had reported a loss of ₹18,560 Crore in the December quarter of 2019. So, for investors who were bailed out by other banks two months ago, the bank’s March quarter results has understandably been on the top of their radar. That’s because after the infamous Q3 report threw some curveballs at them and disconcerting questions, like whether the capital of ₹10,000 Crore was adequate to revive the bank, have been lingering in the minds of depositors and investors ever since. After the heavily delayed report on bad loans and alarming trends of Yes Bank’s liquidity and capital structure, if the bank continued to see deposit outflows after restrictions were lifted on March 18, was another such question. But, the new report for Q4 sadly didn’t alleviate any of these concerns.
Provision for investments jumped up to ₹3,336 Crore during the quarter as opposed to ₹243 Crore. It includes a ₹1,228 Crore provisions on exposure to a housing finance company, which is now 100% provided for, the bank said. Furthermore, the COVID-19 related standard asset provision has been calculated at ₹238 Crore. Another ₹2,012 crore provision was made anticipating the exposure to various entities of a ‘Diversified Conglomerate’. But a sizeable portion of loans have fallen under the moratorium (35-45% across MSME, corporate, and retail). So, Industry insiders are saying that with sharp downgrades, very likely in corporate books (SMA 1, currently at ₹10,781 Crore) going forward, the bank’s provisions could go up sharply in the coming quarter.
Provisions for the quarter have added up to a total of ₹4,872.34 Crore against the ₹3,661.70 Crore that was secured during the fourth quarter of 2018-19. But, experts are still saying that the Capital and liquidity ratios slipping below the regulatory requirement, steady withdrawal of deposits even after pertinent restrictions were lifted (₹32,000 Crore between March 18 and March 31), cast grave concerns over the bank’s ability to continue as an ongoing venture.
The bank’s asset quality deteriorated on an annual basis but improved sequentially. The report stated that the gross non-performing assets (NPA) as a percentage of total advances was 16.8% as on March 31 as compared to 3.22% a year ago. Albeit, this bad loan figure is still lower than the 18.87% NPA which was reported for Q3FY20.
On the other hand, the net interest income of the bank fell 49% on year to ₹1,274 Crore even though non-interest income grew by 12% to ₹597 crore. The net interest margin (NIM) for the quarter was 1.9% as compared to 3.1% a year ago and 1.4% in the third quarter. The lender deposit deposit base has seen a sharp reduction from ₹209,497 Crore from September 30, 2019 to ₹165,755 crore as on December 31, 2019 and further to ₹105,364 crore as on March 31 and ₹102,717 Crore as on May 2, 2020.
In the notes accompanying the earnings release, the bank said that the AT-1 bonds were been fully written down permanently on March 14, 2020 and has been disclosed as an extraordinary item. The bank’s core equity tier-1 or CET-1 ratio and Tier-1 ratio stood at 6.3% and 6.5% respectively. These ratios are way lower than their respective regulatory requirement of 7.375% and 8.875%. The bank has explained that the breach in capital ratios has been on account of its decision to increase its provision cover (only marginally to 73.8% from 72.7% in December quarter). But, the quantum of provisions made in light of the increasing risk on account of the pandemic, seem to be inadequate.
Summarily, the bank’s bare bones capital would not be enough to absorb future losses. If RBI places the bank under ‘Prompt Corrective Action’ (PCA) on breach of CET ratio, it could make the already long drawn revival plan of the bank, more challenging. This plan of theirs hinges on the continual support of its benefactors who can run aground if the pandemic worsens. Hence the critical question is whether SBI and the other seven lenders of Yes Bank can pump in more capital given their own capital constraints due to the ongoing crisis.
Yes Bank’s asset quality woes began in the March 2017 quarter when it first declared divergence in bad loans pertaining to the previous FY16 fiscal. Since then even as the bank continued to deliver robust loan growth, concerns over governance and asset quality started to weigh on its stock. The bank’s Q4FY19 results, unmistakably pointed to the fast deteriorating asset quality and financials of the bank as their provisions for bad loans had jumped ten-fold to ₹22,328 Crore in that quarter. Meanwhile, its CET 1 ratio has plummeted to 0.6 per cent from 8.7% in September quarter.
Yes Bank’s liquidity coverage ratio (LCR) had sunk to 74.6% owing to substantial deposit outflows of about ₹44,000 Crore. Before restrictions were placed by RBI, withdrawal of deposits had added to ₹28,000 Crore since December. As a result of this, the LCR dropped to 20.9% against regulatory requirement of 100%. The bank is also in breach of its statutory liquidity ratio (SLR) requirement which impairs its ability to raise money quickly. ALl of this has led to a penalty of ₹334 Crore for the troubled bank, as of yet.