Buying stake in the sick private lender YES Bank has become a dilemma for the State Bank of India (SBI) and other state run lenders as the acquisition might cost them Rs 20,000-30,000 crore of NPAs or bad loan.
According to media reports, the government is keen to form a SBI led consortium to take over YES Bank.
YES Bank’s stock rose 26% to Rs 37 per share following the development which increased the cost of buying a majority stake in the bank to Rs 1,900 crore if done at the current market price.
SBI’s shares had fallen nearly 4% after the news but recovered and were later trading 3% higher at Rs 293.
SBI has been authorized to pick other members of the consortium, and the announcement is expected soon.
According to Macquarie Capital, SBI and other lenders need not pay more than Re 1 for YES Bank share as the private lender’s net worth is zero and there is lack of clarity on the bank’s deposit franchise due to the solvency issues.
YES Bank has a net-worth of around Rs 25,000 crore. Its below investment grade book (BB&Below) is around Rs 30,000 crore and BBB book is at around Rs 50,000 crore.
If we assume substantial proportion of BB&below book is wiped off and say 10-15% of BBB book is to be written off, it implies the current net-worth of the bank is zero (after factoring in 25% tax benefits).
There are concerns about YES Bank’s quality of liabilities franchise which perhaps could have been further affected due to the current solvency issues.
Consolidation would have brought about a lot of integration challenges as well as legal challenges as we believe SBI Act needs to be amended for SBI to acquire a private sector bank.
Even in this case, the deal will require blessings of the regulator as well as the government
YES Bank has so far failed to bring a strategic investor. It had approached mutual funds for raising fresh equity capital worth $300-$500 million.
The critical thing to watch would be percentage dilution of equity taking into consideration the conversion of existing bonds issued by YES Bank into equity.
Meanwhile, individual investors, which hold nearly 48% stake in YES Bank, heaved a sigh of relief.
YES Bank promoters held 8.33% stake in the bank, while mutual fund and foreign portfolio investors held 5.09% stake and 15.17% stake as of December 31.
The fact that government is considering such a bail out proposal clearly shows the risk inherent in investing in state run lenders who continue to be subjected to the vagaries and compulsions of the government.
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