YES BANK LTD FPO NOTE (Avoid)

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Review By Rudra Shares & Stock Brokers Ltd on July 15, 2020

VALUATION

The ongoing COVID-19 pandemic has negatively impacted the global economy and thereby the bank. As a result, it has impacted customer base and we expect this to continue further in respect of their loan repayments which could result in higher NPA's going ahead. Already, there is a concern regarding asset quality for the bank & various other concerns relating to significant decline in the Bank's deposit base due to further increase in moratorium period. The increase in the Bank's Net NPA ratios and credit rating downgrades has put pressure on the bank.

Moreover, there is also a breach in of Tier 1 capital ratio as at 31 March 2020. The CET1 ratio and the Tier 1 capital ratio for the Bank as at 31 March 2020 stood at 6.3%.and 6.5 % as compared to the minimum requirements of 7.375% and 8.875% respectively.

SBI which is the biggest shareholder in YES Bank, is providing further support for a maximum investment of up to Rs 1,760 crore in the FPO could provide some strength to the bank. Also, the stock is available at discount of 50% at Rs 13(on upper price band) per share. Still, we cannot ignore the weak fundamentals of the bank with losses & contingent liabilities hovering around. Higher risk taking investors may invest in the FPO with significant risk reward ratio. However, we recommend to AVOID the FPO.

SUMMARY TO THE FPO

Ø Heavy equity dilution: The outstanding number of equity shares of Yes bank  is around 1255cr. Through this FPO, it is  planning to raise around Rs 15000cr which implies straight 50% dilution in the equity base(around new Rs 1154-1250cr equity share capital  expected to be issued).

Ø The main aim of the FPO is to generate adequate capital to support growth and expansion, including enhancing solvency and capital adequacy ratio. But, this again can support the growth story for time being only. The bank's NPA's are already on the rise and over the top extension in the EMI moratorium is likely to build pressure on their loan books.

Ø There were a lot of corporate governance issues in YBL. Now, as  series of lenders has infused equity & SBI is planning to infuse another tranche of equity of ` 1760cr , we expect this can bring in positive sentiments for bank.

Ø Yes Bank's new management has set the objective to rebuild the bank and calibrate growth over the next six to twelve months by rebuilding liabilities and liquidity buffers, optimising cost, strengthening the governance and underwriting framework, and focusing on stressed assets resolution.

Ø ROA is expected to improve1-1.5% in next 3-5years.

THE OFFER

Issue Open : 15 July 2020 to 17 July 2020

  »»  Issue Type:  Book Built Issue FPO

    »»  Total Issue Size:  Rs 15000 cr

   Ü Fresh issue:  Equity Shares @ 2 aggregating up to Rs 15000cr   

       »»  Face Value: Rs 2 Per Equity Share 

  »»  Issue Price:  Rs 12  - Rs 13 Per Equity Share 

  »»  Market Lot:  1000 Shares 

  »»  Minimum Order Quantity:  1000 Shares 

  »»  Listing At:   NSE & BSE

  »» Employee Discount: Rs 1 per share

CAPITAL STRUCTURE

The  share capital of Company, is set forth below:-

                                                                                                                   (Amount in Rs except share data)

Authorized Share Capital :-

 30,000,000,000 Equity Shares @2 Aggregate value Rs 60,000,000,000

20,000,000 Preference Shares @100 Aggregate value Rs 2,000,000,000

Issued, subscribed and paid up capital before the Offer :-

 12,550,472,231 Equity Shares @2 Aggregate value Rs 25,100,944,462

OBJECT OF THE OFFER

The objects of the Offer are:

Ensuring adequate capital to support growth and expansion, including enhancing solvency and capital adequacy ratio

LOCK-IN DETAILS

Lock-in of Equity Shares pursuant to the Reconstruction Scheme

    Ø SBI is required to hold at least 26% of the equity share capital of the Bank (for a period of three years from the date of allotment of the Equity Shares pursuant to the Reconstruction Scheme, i.e. from March 14, 2020) and shall not hold more than 49% of the equity share capital of the Bank;

     Ø Housing Development Finance Corporation Limited, ICICI Bank Ltd., Axis Bank Ltd., Kotak Mahindra Bank Ltd., The Federal Bank Ltd., Bandhan Bank Ltd. and IDFC First Bank Ltd. are subject to a three year lock-in for 75% of the Equity Shares allotted to them under the Scheme from the commencement of the Reconstruction Scheme i.e. March 13, 2020;

   Ø Existing shareholders (other than shareholders holding less than 100 Equity Shares) in the Bank as on March 13, 2020 are subject to a lock in for 75% of their shareholding for a period of three years from the commencement of the Scheme, i.e. from March 13, 2020.

COMPANY OVERVIEW

Yes bank, a new generation private sector bank in India incorporated as a public limited company in November 2003 and obtained certificate of commencement of business in 2004. Then, in May 2004, company granted a license by the RBI under Section 22(1) of the Banking Regulation Act to commence banking operations in India. In March 2020, the Government of India notified the 'YES Bank Limited Reconstruction Scheme 2020'. Since the implementation of the Reconstruction Scheme, have formulated new strategic objectives which aim at augmenting deposit base and liquidity buffers, optimizing operating costs, building stronger governance and underwriting framework and focusing on stressed assets resolution over the next six to twelve months.

  It is one of the leading providers of new-age payments services. YBL has undertaken several IT & digital initiatives that are expected to contribute to its business shortly. In FY 2020, the Aadhar Enabled Payment India System ('AEPS') is one of the leading acquirer banks by volume transactions, with a growth of 2X as compared to the previous FY and has processed over 330 million transactions. Immediate Payment Service and Unified Payments Interface are other payment services.

  Its  presence covers all 28 states and eight union territories in India and one representative office in Abu Dhabi as of March 31, 2020. Also, is a full-service commercial bank specialising in merchant banking, digital banking, brokerage business, asset management and investment banking.

Going ahead:  As per RHP,

? Bank aspire to gain market share in strategically-selected customer segments, knowledge sectors and geographies while improving the productivity, profitability and efficiency.

? Will continue to develop products and services in order to become more competitive and develop a more balanced portfolio.

?Intend to continue to increase and diversify customer base and delivery channels.

Bank has increased its branch network to 1135 branches as on March 2020 as against 1100 as on March 2018. However, the number of ATMs has decreased from 1,724 as of March 31, 2018 to 1,423 as of March 31, 2020. Its business correspondent agents grew from over 190,000 as of March 31, 2018 to more than 500,000 as of March 31, 2020. Thus, with this expansion is expected to increase the size of business & improve business operations.

The medium term objectives of the bank are:

  Stabilise liability mix and lower cost of funds with an aim to increase CASA ratio to more than 40 percent

  Provide granular advances, with retail, small and medium enterprises being more than 60 percent

  Enhance corporate flows and cross-selling through transaction banking

  Increase Return on Assets to above 1% within one to  three  years and above 1.5% within three to five years.

STRATEGIES

ØLiability Led Business Model- continue to invest resources to diversify  corporate, business banking and retail banking portfolio, with a focus on the retail and SME business segments

ØSustainable and diversified revenue generation- increase customer base in Corporate Banking, Medium Enterprises Banking, SME Banking and Retail Banking business segments

ØFocus on cost optimization

ØEnhancing brand value and strengthening corporate governance

Ø Leverage digital capabilities to scale business

ØStrengthen risk management framework

STRENGTHS

ØSimplified organisation structure backed by marquee institutions and experienced leadership team

Ø Differentiated technology platform leading to digital leadership

ØWell-established granular banking platform with a strong focus on retail and SME advances

ØDiverse and scalable revenue streams

ØWide Pan India Presence

Øcustomer centric approach

ØKnowledge-based approach to banking enabling cross-selling

FINANCIAL HIGHLIGHTS

Bank's advances have decreased from Rs 203,518.83 cr in FY18 to Rs 171,433.10 cr as on FY20, at a CAGR of (8.22)%. As on FY2019 and 2020, the Bank's top 20 advances totaled, Rs 61799.32cr and Rs 439,79.90 cr, which represented 13.28% and 11.62% of the Bank's total advances.

The total net income has decreased from Rs 12,960.8 cr for FY 2018 to Rs 102,746.73 cr for FY20, at a CAGR of (11.08)%.

 Operating profit (before provisions and contingencies) decreased from Rs 7,748.11 cr for FY18 to Rs 3,517.51 cr for FY20, at a CAGR of (32.62)%.

 Net profit decreased from Rs 4,233.22 cr for FY18 to a net loss of Rs 16,432.58 cr for FY20 due to heightened slippages during fiscal year 2020 and consequent provisioning.

  Total net income and operating profits were lower in FY 2020 mainly due to significant increase in NPA and lower non-interest income driven by lower fee income. Going forward, bank will continue to invest resources to diversify corporate, MSME and retail banking portfolio, with a focus on the retail and MSME business segments.

 As of March 31, 2020, the Bank had total contingent liabilities of Rs 4,58,526.09 cr, amounting to an equivalent credit exposure of Rs 58,172.30 cr

The current deposits and savings deposits ('CASA') decreased from Rs 73,176.18 cr as on FY18 to Rs 28,026.84 cr  as on FY20, at a CAGR of (38.07)%. 

  The CASA ratio (ratio of CASA deposits to total deposits) was 26.63% as of March 31, 2020, which represented a decrease as compared to 33.06% as of March 31, 2019 and 36.45% as of March 31, 2018

  Gross NPA increased to Rs 32877.59 cr in FY20 from Rs 7882.56 cr for FY19 representing an increase of 16.80% in FY20 as against 3.22% in FY19 of bank's advances. The NPAs (net of provisions) ('Net NPAs') represented 1.86% and 5.03% of the Bank's net advances, as on FY19 & FY20respectively.

  The Bank has recorded net provisions of Rs 327,58.43 cr for FY2020, representing a 466.99% increase as compared to the net provisions of Rs 57,77.56 cr for FY19. While the Bank has already made provision coverage for NPAs with respect to 43.10% and 73.77% of Gross NPAs as on FY2019, and FY2020, respectively.

  The capital adequacy ratio decreased from 18.4% as on FY18 to 16.5% as at FY19, and to 8.5% as at FY20, due to higher provisioning requirements. In spite of the write back of the AT1 bonds on 14 March 2020 there is a breach of Tier 1 capital ratio as at 31 March 2020. The CET1 ratio and the Tier 1 capital ratio for the Bank as at 31 March 2020 stood at 6.3%.and 6.5 % as compared to the minimum requirements of 7.375% and 8.875% respectively