Should One Opt for Yes Bank FPO Shares?
In the quarter ended December 2019, Yes Bank reported heavy losses that eroded its reserves significantly, leading to a dramatic drop in its Capital Adequacy Ratio (CAR), even below the 1.0 CET1 level. While Indian scheduled commercial banks are required to maintain a CAR of at least 9%, and Indian Public Sector Banks are to maintain a CAR of 12%, Yes Bank faced critical challenges.
Financial Troubles and External Support
By March 2020, Yes Bank’s CAR stood at a mere 8.5%, far below the required norms. In a bid to stabilize the bank and the Indian banking system, SBI and other banks invested in Yes Bank. Even with this equity infusion, Yes Bank still found itself on the brink of default.
Reasons for Offering FPO at a Discount
Yes Bank is once again facing the need to raise capital to ensure its survival. Given its poor financial health, the bank’s doors to the debt markets are already closed. At the beginning of 2020, the bank had written off perpetual AT1 bonds, leaving it with no other option but to seek equity investors through a Follow-On Public Offer (FPO).
Financial Metrics in Crisis
From March 19 to March 20, the bank saw a significant increase in Gross Non-performing Assets (NPAs) and EMI due to more than 90 days from 3 to 17. Net NPAs have also increased from 2.5% to 3%. Additionally, the Liquidity Coverage Ratio (LCR) has dropped to just 40%, well below the RBI’s recommended 80%.
Future Outlook and Portfolio Problems
The bank's future looks uncertain. Its Below-rated corporate portfolio, which includes BB-rated assets, stands at a staggering 11. A significant portion of these advances are at risk of becoming NPAs in the near future. Furthermore, the SMA1 (Stressed Assets Monitoring and Analysis) EMI due for more than 30 days has reached 6, indicating a cycle of defaults.
RBI had imposed a moratorium until August 31 to prevent further asset classification issues. However, the true impact of defaults is likely to become apparent once this moratorium ends. The third quarter of the fiscal year 2021 will likely provide a clearer picture, and it may be a harrowing one.
Conclusion: A Risky Investment?
Given the bank's current financial state, it is not advisable to invest in Yes Bank FPO shares. Despite the discount price, the fundamental indicators suggest that this is a high-risk investment. Since the FPO announcement, the stock price has already dropped by 30%, and further declines cannot be ruled out. Even if the FPO provides short-term returns, it is not a suitable long-term investment.
Investors should carefully consider the financial health and future outlook of Yes Bank before making any investment decisions. Seeking expert advice and thorough research is highly recommended before considering any investment in the FPO.