Specialist in Indian Banking and Economic Research

Hemindra Hazari

Equity Bottom-Up

The Reserve Bank of India’s (RBI)  <a href="https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49479" target="_blank" rel="noopener">draft scheme</a> for the reconstruction of <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> is unlikely to restore the confidence of the bank’s depositors, especially its current and savings account (CASA) depositors, who are likely to desert the bank once the moratorium is lifted. Once a bank is put under a moratorium its deposit franchise is irrevocably eroded, as banking is all about trust, and that is lost when depositors are allowed to <a href="https://rbidocs.rbi.org.in/rdocs/content/pdfs/DD05032020.pdf" target="_blank" rel="noopener">withdraw</a> only Rs 50,000 (US$ 676). In such a situation, to prevent a run on deposits once the moratorium is lifted, Yes Bank should have been nationalised, or merged with a large government bank like State Bank of India (SBI) or with a credible private sector/foreign bank. Since the government and the RBI have been unable to achieve a merger with another bank, they have gone in for the proposed option of SBI holding 49% in the reconstituted equity of Yes Bank.  To remain viable, Yes Bank requires an equity injection estimated at around Rs 214 bn (US$ 3 bn), which is difficult for any credible private sector entity or large foreign bank to deploy. The alternative of a SBI-led consortium of investors reviving the bank is unlikely to be viable once the moratorium is lifted.During the moratorium, the asset quality of Yes Bank’s borrowers is likely to further worsen, especially for those who are mainly dependent on Yes Bank to finance their working capital. As per a <a href="https://www.crisil.com/en/home/our-analysis/views-and-commentaries/2020/03/cascading-impact-of-yes-bank-moratorium.html" target="_blank" rel="noopener">CRISIL (a S&amp;P Company) report</a>, in the case of 210 companies, “Yes Bank’s share exceeds 40% of their aggregate CRISIL-rated bank facilities.”  This will put further stress on the bank and on the financial system. The failure of Yes Bank, with deposits of Rs 2,094 bn (US$ 28.3 bn) and loans of Rs 2,195 bn (US$ 29.7 bn) as of September 30, 2019 is likely to result in a loss of confidence in other private sector banks which are facing asset quality issues. The share price declines of <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a> , <a href="https://www.smartkarma.com/entities/rbl-bank-ltd" target="_blank" data-smartkarma-citation="entities:22856:1" rel="noopener">RBL Bank Ltd (RBK IN)</a> and to a lesser extent <a href="https://www.smartkarma.com/entities/idfc-first-bank-limited" target="_blank" data-smartkarma-citation="entities:26934:1" rel="noopener">IDFC First Bank Limited (IDFCBK IN)</a>  in the last 1 year make them particularly vulnerable.When a large private sector bank fails, it is the responsibility of the government and the RBI to either merge the failed bank with a larger bank or nationalise the bank to restore depositor confidence in the economy. Unfortunately, the fetters of fiscal consolidation imposed by global capital and credit rating agencies have tied the hands of the Indian government. So when a large bank like Yes fails, the authorities avoid using the direct budgetary route, and instead choose to compel a bank like SBI to invest in the failing bank to restore confidence. The obsession with the fiscal deficit has contributed to the slowdown in the economy, and is likely to further weaken the banking system as the government abdicates its responsibilities, shoving them on to other state-backed players and thereby further lowering confidence in India’s strategic banking system.

The Reserve Bank of India’s (RBI)  draft scheme for the reconstruction of Yes Bank (YES IN) is unlikely to restore the confidence of the bank’s depositors, especially its current and savings account (CASA) depositors, who are likely to desert the bank once the moratorium is lifted. Once a bank is put under a moratorium its deposit franchise is irrevocably eroded, as banking is all about trust, and that is lost when depositors are allowed to withdraw only Rs 50,000 (US$ 676). In such a situation, to prevent a run on deposits once the moratorium is lifted, Yes Bank should have been nationalised, or merged with a large government bank like State Bank of India (SBI) or with a credible private sector/foreign bank. Since the government and the RBI have been unable to achieve a merger with another bank, they have gone in for the proposed option of SBI holding 49% in the reconstituted equity of Yes Bank.  To remain viable, Yes Bank requires an equity injection estimated at around Rs 214 bn (US$ 3 bn), which is difficult for any credible private sector entity or large foreign bank to deploy. The alternative of a SBI-led consortium of investors reviving the bank is unlikely to be viable once the moratorium is lifted.During the moratorium, the asset quality of Yes Bank’s borrowers is likely to further worsen, especially for those who are mainly dependent on Yes Bank to finance their working capital. As per a CRISIL (a S&amp;P Company) report, in the case of 210 companies, “Yes Bank’s share exceeds 40% of their aggregate CRISIL-rated bank facilities.”  This will put further stress on the bank and on the financial system. The failure of Yes Bank, with deposits of Rs 2,094 bn (US$ 28.3 bn) and loans of Rs 2,195 bn (US$ 29.7 bn) as of September 30, 2019 is likely to result in a loss of confidence in other private sector banks which are facing asset quality issues. The share price declines of Indusind Bank (IIB IN) , RBL Bank Ltd (RBK IN) and to a lesser extent IDFC First Bank Limited (IDFCBK IN)  in the last 1 year make them particularly vulnerable.When a large private sector bank fails, it is the responsibility of the government and the RBI to either merge the failed bank with a larger bank or nationalise the bank to restore depositor confidence in the economy. Unfortunately, the fetters of fiscal consolidation imposed by global capital and credit rating agencies have tied the hands of the Indian government. So when a large bank like Yes fails, the authorities avoid using the direct budgetary route, and instead choose to compel a bank like SBI to invest in the failing bank to restore confidence. The obsession with the fiscal deficit has contributed to the slowdown in the economy, and is likely to further weaken the banking system as the government abdicates its responsibilities, shoving them on to other state-backed players and thereby further lowering confidence in India’s strategic banking system.

Yes Bank: Bungling the Rescue May Lead to Further Crisis

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

IDFC First Bank Limited / Equity Bottom-Up

The results are incredibly poor. This is despite the former infrastructure lender having merged with a consumer bank.  The deterioration in credit metrics is stunning and we would argue, another sign that India remains in the throes of a bad loan cycle. With persistently high interest rates and slowing growth, one is compelled to forecast higher bad loans, higher credit costs. The resultant loss at <a href="https://www.smartkarma.com/entities/idfc-first-bank-limited" target="_blank" data-smartkarma-citation="entities:26934:1" rel="noopener">IDFC First Bank Limited (IDFCBK IN)</a> puts capital at risk – it’s not only about earnings.

The results are incredibly poor. This is despite the former infrastructure lender having merged with a consumer bank.  The deterioration in credit metrics is stunning and we would argue, another sign that India remains in the throes of a bad loan cycle. With persistently high interest rates and slowing growth, one is compelled to forecast higher bad loans, higher credit costs. The resultant loss at IDFC First Bank Limited (IDFCBK IN) puts capital at risk – it’s not only about earnings.

India

IDFC First Bank Limited provides a full range of commercial banking services for retail and institutional customers. The Bank offers fixed deposits, debit cards, savings account, cash management, and other services. IDFC Bank serves its customers in India.

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IDFC First Bank Limited (IDFCBK IN)

Yes Bank: Bungling the Rescue May Lead to Further Crisis

The Reserve Bank of India’s (RBI) draft scheme for the reconstruction of Yes Bank (YES IN) is unlikely to restore the confidence of the bank’s...

Hemindra Hazari

IDFC First Bank – Last

The results are incredibly poor. This is despite the former infrastructure lender having merged with a consumer bank. The deterioration in credit...

Daniel Tabbush

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