YES Bank’s $2 billion fund raising plan fails to lift stock; what’s the worry?

NEW DELHI: YES Bank’s $2 billion fund-raising plan failed to lift shares of the private lender on Monday, as analysts said Dalal Street has reservations about the quality of the investors.

The scrip closed 6.22 per cent down at Rs 64.05 on BSE.

YES Bank last week said Canadian billionaire Erwin Singh Braich is likely to be a prime investor and buy more than half of the total equity dilution, or $1.2 billion.

Analysts raised doubts whether RBI would give its approval to any investor, who wants more than 10 per cent stake in a bank. They also raised doubts over the quality of investors willing to infuse funds in the bank.

The YES Bank management begs to differ.

"Out of the $2 billion funding, only $180 million is from well-known investors. While the lesser-known SPGP and Citax group have clarified to media their firm interest in Yes Bank and the sources of their funding, they would need to clear the RBI’s ‘fit and proper’ test, given these investors will have a large shareholding in Yes Bank if the proposed capital raise gets the regulator’s approval," Nomura India said.

An RBI approval is mandatory for stake purchases of more than 5 per cent in any domestic bank. Any non-financial entity can buy up to 10 per cent in a lender. For a financial entity, the cap is set at 15 per cent.

Sources told ETNOW last week that RBI may not make an exception for one individual to hold over 15 per cent of voting rights in a bank.

While large capital raising would address the going concern worry for the bank, the quality of investor remains a worry, brokerages said.

The private lender told stock exchanges that it was holding discussions with Braich, which will be concluded shortly. The binding term sheet for the deal has since been extended to December 31, 2019.

Two other investors, Citax Holdings & Citax Investment Group, may invest $500 million. A US fund house, whose name will be disclosed soon, is keen on investing $120 million, the bank said.

Besides, domestic investors such as GMR Group ($50 million), Aditya Birla Family ($25 million) and Rekha Jhunjhunwala ($25 million), too, are eyeing a slice of the pie. Foreign funds Discovery Capital ($50 million) and Ward Ferry ($30 million) make up the rest of the investors.

YES Bank CEO Ravneet Gill told ETNOW that even if the stake sale works out to be 25 per cent, the voting rights will be much lower than that. “It is important to understand that there is no desire for control as far as this investor is concerned. He sees private sector banking in India as a very strong investment thesis. He wants to be long-term investor, but wants to be financial investors,” he said.

Gill said the agreements are binding in nature and preferential allotment will be provided to the investors. The investment comes with a one-year lock-in period. The market should not pass any immediate judgement, he said.

“The existing shareholders agree to the fact that the bank needs more capital as it is trading at a discount. The valuation will pick up once capital is infused. More capital is a good omen, which would change the narrative for the bank. The allotment will be above market price," Gill said.

Umesh Mehta, Head of Research, Samco Securities, said other than Erwin Singh Braich, none of the investors appear to be strategic. “Most investors are keen on taking advantage of the price fall and would exit once they make profits," he said.

Mehta said the development may have a positive impact on the stock in the short term, but any upside on the counter will remain capped. “In the immediate term, investors will over-react to the news. Eventually the stock may go for correction as the equity capital will almost be doubled,” he said.

Nomura India said that a large capital raise would address the going concern worry for the bank, but the road to PPOP recovery will likely be tough and gradual, and there has been little success in resolution of stressed accounts involving Yes Bank in the past 12 months.

The YES Bank board is expected to meet again on December 10 to finalise fundraising details and convene an EGM.

In any case, any prospective investor in the bank will need to gradually reduce stake below 15 per cent within three years as per RBI norms.

“We will avoid this single stock. It is an entity which is in some stress. It will be good if the market gives it sometime and looks the other way,” Prateek Agarwal, ASK Investment Manager, told ETNOW.

Brokerage Edelweiss Securities said, "Upfront stress recognition makes capital infusion the need of the hour. Even after capital infusion, risk appetite is likely to remain weak and the bank may not be viewed as a growth story over the medium term.”

The bank's book and asset quality have deteriorated in last 12 to 15 months. The bright spot is the turning asset cycle, which may abate the delinquency risk. YES Bank’s evolution in the last decade was driven by a preference for scale-over risk, it said.

One of the key risks is the bank’s ability to raise capital, as any upsetting news will restrict its ability to clean up the balance sheet and limit growth options, the brokerage said.