What has gone wrong with Yes Bank
- Yes Bank was run like a tight ship by Rana Kapoor and with his departure investors are worried about growth.
- Regulator removing a bank CEO sounds like a bad headline and many money managers must have exited the stock as they cannot justify holding on to their clients.
- Financial companies generate ROE of 15-20% but can grow their per share book value at 25-35% by raising fresh equity at a huge premium to book value. Some investors (me included) would have invested in Yes Bank as it was planning to raise capital in 2018-19. With these troubles, fresh capital raising looks far away and at 1.5 times book value, will not boost the per share book value as much as it would have when shares were selling at 3.5 times book value. Such investors would have left (me excluded) and will not come back until shares trade at a high premium to book value and there are fresh capital raising plan.
- Yes Bank has been slow to make provisions for NPAs and it was even slow to recognize NPAs to begin with. This is because (IMO) it makes loans to non-prime borrowers who often fall behind on their payments but do not default. RBI is getting tough on such cases which means Yes Bank will have to recognize more NPAs and also has to increase provisions until the coverage ratio jumps back up to 65-70%. My estimate is that it can wipe out one year profits.
- RK has the ability to ensure that borrowers pay. With RK gone, bank may see some trouble on recovery side but this is all guesswork and speculation so I am not too much worried about it. IMO Yes Bank is no more a one-man show and a portfolio of 2 lakh crores cannot be managed by a single person. There must be a second tier that has the skills to assess credit and make recoveries.
- With promoters fighting over control, there is considerable uncertainty over when can the bank appoint a new MD and get it approved by RBI. Uncertainty has pushed price lower.
- Media hungry for ratings, is busy digging for red flags.
- Directors resigning won’t go well with investors irrespective of the reason. Investors are choosing to stay away first and ask questions later.
- Ratings downgrade is the latest shoe to drop. It will increase borrowing costs and reduce profitability.