Is YES Bank still too risky to invest?

Yes Bank is known to every retail investor; it is one of the most traded stocks, and its two-digit price attracts a large number of retail participants. People invest in the stock, but most of the retail participants don’t know about the bank’s situation, financial health, or future growth trajectories. So, we will analyze the past, present, and future of the bank.  

Yes Bank is an Indian private-sector bank headquartered in Mumbai. It caters to retail customers, MSMEs, and corporate clients and was founded in 2004 by Rana Kapoor and Ashok Kapur. Yes Bank has a wide network, is spread across 300 districts in India, and comprises 1198 branches and 1287+ ATMs.  

This bank provides various services, and if we look at the portfolio, it consists of the following:  

1. Retail Banking  

2. Corporate Banking  

3. Digital and Technology Solutions  

4. Private Banking  

They can be broadly classified into various categories:  

Accounts and deposits, loans and advances, cards, investments, and insurance  

Digital banking, API banking, fintech partnerships, etc.  

It quickly positioned itself as a high-growth private sector bank in India, focusing on corporate and retail banking.  

But every story has ups and downs; till 2019, the company has grown, and in 2020, a major setback came for the bank.  

YES Bank crisis:  

Yes Bank has grown tremendously since its inception and has attained success. It received a huge response and confidence from customers, investors, companies, credit rating agencies, and the government, but suddenly an unexpected thing happened.  

In 2015, UBS, a global financial service company, reported that YES Bank has provided loans to various companies, including Dewan Housing Finance Corporation (DHFL), the Zee Group, Reliance Group, and Infrastructure Leasing & Financial Services (IL&FS), more than its net worth, which was unlikely to be recovered as the sectors and corporations to which it was lending went into a state of crisis. This has also raised the first red flag about YES Bank’s asset quality.  

Yes Bank’s total exposure to shadow lenders (IL&FS and DHFL) was around 11.5% as of September 2019. The bank’s non-performing assets (NPAs) surged drastically.  

 What is NPA? An NPA is a loan on which the borrower has not made the scheduled payments for a certain period, typically 90 days or more. Non-performing assets indicate potential risks for banks. Yes Bank’s gross NPAs doubled to ₹17,134 crores between April and September 2019.  

This surge made capital raising difficult, as recovering loans became a hard task. Yes Bank’s provisions for bad loans were notably lower compared to other banks, impacting profitability and reducing return on assets. By 2018–2019, the bank’s credit-deposit ratio exceeded 100%, indicating it lent more than it received in deposits.  

Due to its inability to raise capital, Yes Bank experienced a gradual decline in its financial position. This decline led customers and investors to redeem their bonds and withdraw their deposits, affecting the bank’s liquidity. Additionally, YES Bank failed to meet the Reserve Bank of India’s (RBI) minimum statutory liquidity ratio (SLR) requirement.  

What is the SLR requirement? It is a minimum percentage of a bank’s net demand and time liabilities (NDTL) that it must maintain in the form of liquid assets like cash, gold, or other approved securities. The purpose of SLR is to ensure that banks have enough liquidity to meet depositor demands and to secure the financial stability of the banking system.  

The Reserve Bank of India observed that the bank was facing serious corporate governance issues, deteriorated management practices, and weak regulatory compliance.  

Yes, bank investors and customers were scared a lot due to the failure of the bank, which initiated the RBI to come up with the reconstruction scheme. When people start withdrawing money, it will drain the deposit, and that will further weaken the bank. On March 5, 2020, the Reserve Bank of India (RBI) placed Yes Bank under a 30-day moratorium, limiting withdrawals to ₹50,000 per account.  

This step aimed to protect depositors amid growing concerns about the bank’s financial health. Simultaneously, invoking Section 45 of the Banking Regulation Act of 1949, the RBI drafted a reconstruction scheme to stabilize YES Bank.  

After a complex restructuring effort, several prominent investors stepped in to rescue YES Bank, including the State Bank of India (SBI), ICICI Bank, Axis Bank, HDFC, Kotak Mahindra Bank, Federal Bank, IDFC First Bank, and others. These investors collectively injected capital into Yes Bank, with SBI taking a significant 49% stake while others held varying smaller percentages.  

RBI has set some conditions for SBI during the time of reconstruction; they are  

Investment cap: SBI’s investment was capped at 49% of YES Bank equity to ensure that the decision-making authority was distributed among all the other stakeholders.  

Lock-in periods: The RBI set a lock-in period for all investors, and SBI invested up to 49% of the equity with a lock-in period of 3 years for up to only 26% of the 49% SBI invested. For other investors, there was a lock-in period of 3 years for 75% of their investment, and the remaining 25% was not subject to any lock-in. The infusion of capital by various investors and reconstruction led to the survival of the Yes Bank.  

Now the bank has recovered from its failing stage.  

So, before knowing about the company’s internals, strengths, and risks associated with the company, let’s understand the industry first:  

Industry Overview:  

According to the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalized and well-regulated. The Indian banking industry has witnessed the rollout of innovative banking models like payments and small finance banks.  

The Indian banking system consists of 12 public sector banks, 21 private sector banks, 44 foreign banks, and 12 small finance banks.  

According to the Indian Brand Equity Foundation, the total assets in 2023 in the public and private banking sectors were $1686.70 billion and $1016.39 billion, respectively. The interest income of public banks reached $102.4 billion in 2023. In 2023, interest income in private banks reached $70 billion. According to the RBI’s Scheduled Banks’ Statement, deposits at all scheduled banks collectively surged by a whopping Rs 2.04 lakh crore (US$ 2,452 billion) as of FY24.  

According to the RBI, bank deposits stood at Rs. 209.36 trillion (US$2507.62 billion) as of May 3, 2024.  

Strengths:  

1. Profit: The company’s net profit for Q4 FY24 is INR 452 crore, which is up 123.2% year over year. FY24 net profit is INR 1285 crore. The company is performing well and maintaining its profitability; since the reconstruction, it has turned around the profitability of the company.  

In FY20, when it almost went through a crisis, it faced a massive loss of INR 16,433 crores. Later, the company managed to get back on track, and now it is making profits.  

2. Decrease in NPA: In the FY24 report, the company reported GNPA (gross non-performing assets) at 1.7% and net non-performing assets at 0.6%. The company has reduced the NPA ratios, which is positive for a bank because it indicates improved asset quality. A smaller NPA ratio means that a smaller proportion of the bank’s loans are in default, indicating that more borrowers are meeting their repayment obligations. A lower NPA ratio means that more of the bank’s assets are generating interest income, which contributes to the bank’s earnings.  

3. Increase in CASA Ratio: Strong momentum was seen in the deposits, with a growth of 10% QoQ and 23% YoY. This led to a rise in the CASA ratio to reach 30.9% vs. 29.7% QoQ.  

What is the CASA ratio? The CASA (Current Account Savings Account) ratio is a metric used to assess the proportion of a bank’s total deposits in current and savings accounts.  

Current and savings accounts offer lower interest rates compared to fixed deposits. So, when there is a higher deposit in CASA accounts, the bank can acquire funds at a lower cost, which can enhance profitability.  

A strong CASA base ensures that the bank has adequate liquidity to meet its short-term obligations and fund lending activities.  

4. Decrease in slippages: The gross slippage of the company in Q2 FY22 was 4.1%, but in Q4 FY24 it was 2.4%. The slippage ratio is a critical metric in banking that indicates the transition of loans from standard assets to non-performing assets. A lower slippage ratio reflects better credit management and the financial health of the bank.  

Risks:  

1. Credit Risk: The risk arises when a borrower fails to repay the loan. This will impact the overall financial performance of the company, and it will increase the NPA of the company. 2. Contingent liabilities: Contingent liabilities of YES Bank are INR 661,385 crore. Contingent liabilities are potential liabilities that may arise from past events, but their existence depends on future events beyond the control of the company. They are not recorded on the balance sheet but disclosed in the notes to the financial statements.  

2. Interest rate risks: Interest rate risk can significantly impact Yes Bank’s business operations and financial performance in several ways. Net interest income is sensitive to interest risk. Yes, the bank may face increased interest expenses on deposits and borrowings, potentially squeezing its net interest margin. Higher interest rates could reduce demand for loans, affecting YES Bank’s ability to grow its loan portfolio and generate interest income.  

3. Market risk: the risk of losses due to changes in market prices, including interest rates, foreign exchange rates, and equity prices.  

Banks are engaged in international transactions and hold assets and liabilities in different currencies. Exchange rate volatility can lead to losses if foreign currency positions are not properly hedged.  

Financials of the company:  

1. Sales: The major observation should be the sales figures. Though the company’s sales are increasing every year, they are still below the sales figure for 2019. 

The company should focus on sales so that profits will increase as its revenue rises.  

2. Net Interest Income: According to the FY 24 report data, YES Bank’s NII was INR 2,153 crores, marking a 2.3% increase (Y-o-Y) and a 6.8% increase (Q-o-Q).  

For the full fiscal year 2024, NII stood at INR 8095 crore, which is up by 2.2% compared to the previous year.  

This indicates that the bank’s lending and investment activities have improved.  

3. Net Interest Margin:  

Q4FY24: The NIM for Q4FY24 was 2.4%, down from 2.8% in Q4FY23, but remained stable compared to the last quarter.  

FY24: The NIM for the entire fiscal year 2024 was also 2.4%. The decline in NIM from 2.8% in Q4 FY23 to 2.4% in Q4 FY24 is generally negative, as it indicates that the bank is earning less from its interest-earning assets compared to its interest-bearing assets.  

But the stability from last quarter shows margin maintenance in the short term. However, the company should focus on increasing the NIM to achieve good profits.  

4. Non-interest income: According to the FY24 report, the non-interest income was INR 5,114 crores, which is up 38.8% compared to the previous fiscal year.  

A non-interest income rise is very important because it shows and indicates that the bank is earning revenues other than interest. It shows the diversification and strong performance of the bank’s revenue model.  

5. PE Ratio: The overall valuation is directly dependent upon various factors, including the net profit of the company. The PE ratio of Yes Bank is 60.9, which is very high compared to its peers and industry. The banking industry’s PE is just 12.41, but yes, banks’s PE is five times higher. The rise in company sales and margins will increase the net profit of the company, which will reduce PE.  

Shareholding pattern:  

The shareholding pattern of the Yes bank is changing during the reconstruction phase. The DII participation is 69.17%, out of which 49% is held by SBI. SBI sold its stake at 49%, and currently, it holds 23.99%.  

According to a Reuters report, the State Bank of India (SBI) is planning to sell its 24% stake in Yes Bank by the end of March 2025. The stake is worth about $2.2 billion. The Reserve Bank of India (RBI) has verbally approved the proposal and due diligence is underway. SBI has reportedly been in discussions with Japanese lender Sumitomo Mitsui Banking Corp and Dubai-based Emirates NBD about the sale. According to a source, both bidders are interested in acquiring a majority 51% stake in Yes Bank. However, Yes Bank has denied these claims. 

Though DII reduced its stake over the period, FIIs increased their stake with the investments in it.  

In 2022, Yes Bank gets an RBI nod to raise capital from Carlyle and Verventa Holdings. Verventa Holdings currently holds a 9.2% stake in Yes Bank.  

Public participation has decreased over the period. Increasing stakes by MF and FII have been happening over the last two years.  

Growth triggers:  

1. Rapid infrastructure development: infrastructure development drives the demand for corporate loans from construction companies and suppliers. The banks are currently giving 33% of loans to corporations. It will help the bank in the future. Banks can finance large private projects, which leads to higher loan disbursal, which will generate interest income.  

Government Continued spend on the National Infrastructure Pipeline, an increase in private capital, the expansion of public digital infrastructure, path-breaking initiatives such as the PM Gati Shakti Yojana, the National Logistics Policy, and the production-linked incentive schemes to boost manufacturing output, together with India emerging as a preferred alternate supply chain destination, propelled strong growth as reflected across all the key economic indicators.  

2. Increase in income: When people earn more income, they tend to spend more money on their assets. As people cannot afford more in a single go, they opt for the loan. Housing loans, personal loans, car loans, and other different types of loans are given by the bank. When there is a spike in the income of the people, it will benefit the banking industry.  

3. Rising Economy: A rising economy is absolutely crucial for the banking sector to grow. When the economy is heading towards the recession phase, the repo rate will be higher, which will reduce interest rates. Banks will have lower margins compared to the normal growth phases.  

When a country is growing at a decent CAGR, the signs of recession will be less, the RBI will also maintain steady repo rates, and people will also borrow more money. Investors’ confidence will increase as the markets outperform in a growth phase. Overall, the country’s growth will impact the bank.  

Environmental and social governance:  

Environmental:  

1. The bank has pledged to reduce GHG emissions from its operations to a net zero by 2030.  

2. In FY 2022–23, the bank reduced its emissions by an estimated 13.6% from FY 2021–22 and avoided an estimated 4,435 tC02 by switching key facilities to renewable energy.  

3. The Bank continues to support climate-aligned sectors like renewable energy and electric vehicles and to develop targeted products for green financing, such as YES Kiran and rooftop solar loans for SMEs.  

Social:  

1. Yes Foundation has skilled over 4,000 youth, and the aim is to skill over 25,000 youth by 2026. Of these beneficiaries, at least 30% are women, and we have achieved over 70% placements for the trained youth.  

2. Yes Foundation strives to strengthen rural economies by enhancing the earning capability of rural populations by focusing on farm productivity and extension. YES Foundation has enabled entrepreneurship opportunities in over 30,000 villages and is aiming to make a difference in 75,000 by 2026.  

3. To promote women’s empowerment, the bank has launched the YES Livelihood Enhancement Action Program (YES LEAP), a unique, innovative branch-agnostic business model offering comprehensive financial services, primarily unsecured collateral-free microcredit, to women microfinance borrowers through Business Correspondent (BC) partners. The program is spread across 18 states and has impacted the lives of about 37 lakh women.  

Governance:  

There are several governance issues raised within the YES bank. Governance issues are the major reason for the downfall of Yes Bank.  

There are some allegations and issues that happened:  

1. Rana Kapoor, as the CEO of YES Bank, was responsible for significant lending decisions, including substantial loans to DHFL, a non-banking financial company (NBFC) that later faced severe financial distress. The bank lent large loans to DHFL. It is alleged that DHFL, in turn, made investments in a company owned by Rana Kapoor’s daughter. This raised serious concerns about a potential conflict of interest and unethical practices. The specific entity involved was DoIT Urban Ventures, a firm controlled by Kapoor’s family. Reports suggest that DHFL invested in the debentures of DoIT Urban Ventures, facilitating funds for Kapoor’s family business.  

2. Governance issues at YES Bank include poor risk management, a lack of regulatory compliance, ineffective leadership, corporate governance failures, and financial misreporting, all of which led to the bank’s failure.  

3. Now the board consists of six independent directors, two nominal directors from SBI, and non-executive directors. The board is a mix of various experienced and qualified individuals.  

4. Corporate governance is very important; any discrepancies in the governance will lead to the failure of the company.  

That’s the reason why we at Savart, while doing research, give major importance to the ESG section.  

Our APART AI analyzes 1000+ parameters, considers every detail of the company, and recommends accordingly.   

Conclusion: The bank has almost recovered from its losses, getting back on track. The company needs to focus more on sales and margins, which will in turn help their profits grow. While the company should not lend more money to the corporations at high risk, Yes, banks should maintain the NPA, and its CASA plays an important role. Overall, company finances will determine the future of the company. Any governance issues or defaults by the borrowers will desperately impact the business of the bank.  

Savart is a SEBI-registered investment advisor. The purpose of this content is to educate, not advise or recommend any particular security. Please remember that investments are subject to market risks. Please conduct thorough due diligence or seek professional guidance before making any investment. Do not believe in any speculations.