Since 2015, RBI has been in the process of bringing in much needed transparency in balance sheet of PSU banks so government can identify candidates for bailouts and consolidation. Although this exercise is meant for PSU banks, private sector banks are being dragged into RBIās line of fire as it cannot have separate policies for PSU and private banks.
In the process, many private banks (Axis, ICICI, Yes and even HDFC to a small extent) had to classify certain assets as non-performing although by their own assessment it was performing. Now the question investors are asking themselves is which assessment they should trust? RBIās or Bankās?
A set of some 19 accounts is at the center of the issue. These belong to steel, power and infrastructure sector. Many large lenders have lent money to these accounts to varied extent. These are cyclical sectors where a prolonged downturn has caused distress among some borrowers although a chance of outright fraud cannot be ruled out.
RBI identified 6355 Cr of under reporting in case of Yes Bank. Out of this, 1690 Cr has already been recovered so that leaves 4665 Cr. out of that, bank has agreed to classify 1219 Cr as NPA (almost doubling NPAs by its own assessment). That leaves 2984 Cr which Yes bank classified as standard. It is not clear if this classification is in accordance with RBIās revised guidelines or bankās own guidelines. I think thatās the main outstanding issue.
RBI can come back and say that 2984 Cr of loans that Yes classified as standard are indeed non-performing and Yes will have to make provisions for it. If and when that will happen is not clear. Perhaps it may happen over next 2 quarters. To me that appears to be the likely scenario. profit growth could remain subdued.
In case of PSU banks, investors were well aware of zombie loans on their balance sheet going by the p/b value at which these banks have been trading. In case of private banks, I donāt think investors assumed that banks have been under reporting NPA since these banks are trading at 3-5 times their book value. Out of these, IndusInd and HDFC are least impacted and these also trade at highest P/b of 4.8. Axis and ICICI have been reporting elevated NPAs for a while so investors have progressively priced their stocks lower (in terms of P/B). that leaves Yes and Kotak.
Bankās under reported non-performing loans could eventually be written off if not recovered. Since these banks are trading at 3-5 times their book value, for every rupee of write-off, 3-5 rupees of market value will be wiped off.
Yes Banks shares have already dropped 17% since Axis first reported divergence. To me it looks like froth has been cleared. Shares are now trading at 3 times book value which is in line with fair value.
What RBIās Risk Based Supervision exercise has revealed is the worst case scenario in which entire 2984 Cr will be reclassified as NPA (an unlikely case, assuming no further under reporting is uncovered). In that case, Yesās NPA position will still look better than where Axis is today. given that Axis trades at 2 times book value, Yes will be trading much better than this.
Overall, I think market has already pushed Yes Bank 17% lower over last 2 weeks. It could still drift lower but a substantial and permanent loss does not look likely. If RBI expands scope of its RBS and include more troubled NPA accounts, more and more loans will be forced to be classified as NPA. On the other hand, things can turn around and current valuation may appear to be a good opportunity. I would have been worried if Yes was the only one that under-reported. However, other well reputed banks are also reporting similar (although somewhat less dramatic) under reporting.
This is not a case where a single bank has been caught deliberately under reporting bad loans. This could very well turn out to be just a case of misinterpretation of RBI rules.
Disc: Invested.
