Yes Bank FPO Analysis: Should You Subscribe to the Offer?
Yes Bank, after posting heavy losses in the quarter ended December 2019 and facing a significant drop in its Capital Adequacy Ratio (CAR), has once again tapped the public for additional funds through a Further Public Offer (FPO). This FPO is presented at a discounted price due to the poor condition of its books. In this article, we will dive into the financial health of Yes Bank and evaluate whether subscribing to this FPO is a wise decision.
Financial Struggles and Government Intervention
In the quarter ending December 2019, Yes Bank reported substantial losses which severely eroded its reserves, leading to a capital adequacy ratio (CAR) of just 4% CET1, far less than the required 8% as mandated by the Reserve Bank of India (RBI) for Indian scheduled commercial banks. To safeguard the Indian banking system, significant equity infusion was provided by SBI and other banks. Even after this support, the CAR stood at 8.5% by March 2020, still below the requirement of 9%.
The FPO: A Last Gamble
With the doors of the debt markets closed, Yes Bank is now looking to raise capital from the equity markets through a FPO. At the outset of 2020, the bank had written off perpetual AT1 bonds, further complicating its financial situation. Consequently, the FPO is being offered at a discounted price due to the dire straits in which the bank finds itself.
Why the FPO is Risky
Yes Bank's books are in an awful state, as evident from the significant increase in non-performing assets (NPAs) and a drop in liquidity coverage ratio (LCR). From March 2019 to March 2020, the gross NPAs, representing EMIs due more than 90 days, increased from 3 to 17, while net NPAs increased from 2.5 to the unacceptable level of 4.5. The LCR has dropped to a critical 40%, whereas RBI norms stipulate a minimum of 80%.
The bank's future conditions do not look promising. A substantial 11% of its corporate portfolio is rated BB, indicating a high risk of transitioning to non-performing assets (NPAs) in the near future. Additionally, the SMA1, representing EMIs due for more than 30 days, has reached a worrying 6%, indicating a cycle of defaults that could exacerbate the situation.
RBI Moratorium and Outlook
The RBI has granted a moratorium until August 31, which has temporarily stabilized the classification of assets. However, the remaining period until the moratorium ends is highly vulnerable to large defaults. The third quarter results of FY21 will likely reveal the true impact of this moratorium, which may be concerning.
Why a No-Go for Investors
Given the challenging financial landscape, Yes Bank's readiness to raise funds at any cost despite a 50% discount to market prices, one should strongly reconsider the FPO subscription. Considering the fundamentals of the stock, subscribing to this FPO is a complete no-no.
Additionally, since the FPO announcement, the stock price has dropped by 30%, and further declines cannot be ruled out. My analysis suggests that while the FPO may or may not generate short-term returns, it is definitely not a good long-term investment.
Conclusion
In conclusion, subscribing to the FPO of Yes Bank shares is a high-risk, high-reward proposition that is not advisable. The bank's financial health, coupled with regulatory challenges and the current economic climate, make it a suboptimal investment choice.