India-Headquartered Banks: Yes-Stressed Deposit Flight Simulation

India-Headquartered Banks: Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run

India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run

Gravity Works As WeWork Doesn't; Now Plan B

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

In this, the fourth of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratios (LCR) for anticipated cash inflows which may not materialize in the current COVID-19 environment. We then append this result to deposits that are not captured in LCR reports derive a COVID-19 adjusted LCR.LCRs are based on a set of assumptions which may not prove to be valid during periods of stress, as recently occurred at <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>. One of the many assumptions is that cash inflows from performing loans can offset projected deposit outflows in a stressed situation. However, in an environment of widespread payment moratoriums or interest-only repayments, projected cashflow may be materially overstated. This could result in misleadingly higher LCR ratios. At the same time, some banks report non-lending related cash inflows at higher levels than projected loan-related amounts. This is surprising. As such, we remove all cash inflows to derive a cash inflow adjusted LCR. We also incorporate deposits that are not captured by the LCR report to derive a COVID-19 stressed LCR ratio and assess this ratio to see if this is priced-in from a credit perspective.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted as per recent experience.In our first insight, we derived the amount of stable deposits at each major India-headquartered bank and determined if a stable deposit franchise is priced-in, from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-stable-deposits-and-costs-1-year-after-the-yes-bank-silent-run" target="_blank" data-smartkarma-citation="insights:43981" rel="noopener">Stable Deposits and Costs 1-Year After the Yes Bank Silent Run</a>. In our second, we adjusted deposit flight assumption to the reality of what occurred at Yes Bank. We then determined if this “Yes-stressed” LCR is priced-in. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-yes-stressed-deposit-flight-simulation" target="_blank" data-smartkarma-citation="insights:44213" rel="noopener">Yes-Stressed Deposit Flight Simulation</a>.   In our third insight, we incorporated deposits that are not captured in LCR reports. This is the analysis required to understand what broke Yes Bank. We then determined if the Missing Deposit LCR is priced-in from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-missing-deposit-miasma-1-year-after-yes-bank-s-silent-run" target="_blank" data-smartkarma-citation="insights:45438" rel="noopener">Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run</a>.  In follow-up insights we intend to assess extraordinary government actions that recently inflated LCR ratios and then adjust for all of these elements for apocalyptic scenario analysis.

In this, the fourth of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratios (LCR) for anticipated cash inflows which may not materialize in the current COVID-19 environment. We then append this result to deposits that are not captured in LCR reports derive a COVID-19 adjusted LCR.LCRs are based on a set of assumptions which may not prove to be valid during periods of stress, as recently occurred at Yes Bank (YES IN). One of the many assumptions is that cash inflows from performing loans can offset projected deposit outflows in a stressed situation. However, in an environment of widespread payment moratoriums or interest-only repayments, projected cashflow may be materially overstated. This could result in misleadingly higher LCR ratios. At the same time, some banks report non-lending related cash inflows at higher levels than projected loan-related amounts. This is surprising. As such, we remove all cash inflows to derive a cash inflow adjusted LCR. We also incorporate deposits that are not captured by the LCR report to derive a COVID-19 stressed LCR ratio and assess this ratio to see if this is priced-in from a credit perspective.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted as per recent experience.In our first insight, we derived the amount of stable deposits at each major India-headquartered bank and determined if a stable deposit franchise is priced-in, from a credit perspective. Please see Stable Deposits and Costs 1-Year After the Yes Bank Silent Run. In our second, we adjusted deposit flight assumption to the reality of what occurred at Yes Bank. We then determined if this “Yes-stressed” LCR is priced-in. Please see Yes-Stressed Deposit Flight Simulation.   In our third insight, we incorporated deposits that are not captured in LCR reports. This is the analysis required to understand what broke Yes Bank. We then determined if the Missing Deposit LCR is priced-in from a credit perspective. Please see Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run.  In follow-up insights we intend to assess extraordinary government actions that recently inflated LCR ratios and then adjust for all of these elements for apocalyptic scenario analysis.

India-Headquartered Banks: COVID-19 Adjusted Liquidity Coverage Ratios

Asia High Yield Bond Index

India-Headquartered Banks: COVID-19 Adjusted Liquidity Coverage Ratios