Government Approves Plan For SBI-Led Consortium To Buy Yes Bank Stake, Reports Bloomberg
The government has approved a plan for SBI to lead a consortium that will buy a stake in troubled Yes Bank: Bloomberg report.
The directors of State Bank of India are meeting to consider a proposal to invest in struggling Yes Bank Ltd. but no final decision has been taken yet, a person aware of the development told BloombergQuint on the condition of anonymity.
Bloomberg reported earlier in the morning, citing people with knowledge of the matter, that the government had approved a plan for SBI to lead a consortium that will buy a stake to rescue the capital-starved Yes Bank.
Yes Bank, however, informed stock exchanges that it has not received any information on the plan yet. “In the said matter, we would like to clarify that as on date, the bank has not received any such communication from RBI or any other the government or regulatory authorities or from the SBI and we are unaware of any such decision,” the statement said. “Therefore, we are not in a position to comment on such news item.”
Interestingly, State Bank of India, while neither denying nor confirming the news report, told stock exchanges that it will abide by the timelines under SEBI disclosure regulations in disclosing the developments, if any in the matter to Stock Exchanges.
Securities and Exchange Board of India regulations require a listed entity to disclose all material information as soon as reasonably possible and not later than 24-hours from the occurrence of event or information.
We refer to your email dated 05.03.2020 on the captioned subject and advise that we will abide by the timelines under Regulation 30 of SEBI (LODR) Regulations 2015 in disclosing the developments, if any in the matter to Stock Exchanges.SBI statement to stock exchanges
The Rescue Plan
Bloomberg News reported on Thursday morning that the Indian government has approved a rescue plan for Yes Bank Ltd. involving a capital injection by a consortium led by State Bank of India, according to people with knowledge of the matter.
- The announcement is expected soon, the people told Bloomberg, asking not to be identified as the information isn’t public.
- SBI has been authorised to pick other members of the consortium, the people said.
- A Finance Ministry spokesman wasn’t immediately available for comment.
- Representatives for Yes Bank and State Bank didn’t immediately reply to emails seeking comment.
RBI Comment
RBI Governor Shaktikanta Das refused to comment on the report of such a rescue plan being led by government-owned SBI. In an exclusive interview to BloombergQuint on Friday afternoon the governor said “RBI remains committed to ensure that our banking system is strong and stable”.
Firstly, I don’t want to respond to a media speculative question because any response to that has a lot of arbitrage value and implications. But let me say that RBI remains committed to ensure that our banking system is strong and stable. At the moment, I would like to reiterate that our banking system remains safe and stable. Overall, RBI remains committed to ensure that we have a stable and sound financial and banking system.Shaktikanta Das, Governor, Reserve Bank of India
Shares of Yes Bank jumped as much as 26 percent, the most since October 2019, to Rs 36.80 on the National Stock Exchange. On the other hand, shares of SBI fell as much as 5.36 percent to Rs 270, but later recovered to close 1 percent higher at Rs 288.50
Analyst View
The Yes Bank stock rally was unjustified, said a JP Morgan research note that described the potential rescue as a “bondholder/depositor bailout and not an equity one”.
The new capital will likely come in at a steep discount to current share price, as forced “bailout” investors will likely want a large cut for equity holders and it remains to be seen if AT1 at the bank will be called for dilution, as such a move could have implications for future similar issuances by private banks.JP Morgan Research Report - March 5, 2020
A stake purchase is better than consolidation, said a Macquarie Research report, citing uncertainty around the private lender’s liabilities franchise (deposits). “We are unsure of Yes Bank’s quality of liabilities franchise which perhaps could have further got 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.”
The note also points to potential deterioration in Yes Bank’s loan book, and hence indicates a purchase price of next to nil.
Yes Bank has a net-worth of ~Rs 250 billion. Its below investment grade book (BB&Below) is at ~Rs 300 billion and BBB book is at~Rs 500 billion. 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 networth of the bank is zero (after factoring in 25% tax benefits). So ideally and theoretically speaking, SBI and other PSU banks need to buy the bank at Rs 1.Macquarie Research Report - March 5, 2020
JP Morgan concurred. “We believe forced bailout investors will likely want the bank to be acquired at near zero value to account for risks associated with the stress book and likely loss of deposits (Q3 financials have still not been disclosed),” the report said.
Both reports pointed to the moral hazard of such a move and its implications for SBI.
“Implications for SBI being called for “national service” we believe are incrementally negative for its valuations as it sets a precedent for nationalization of any future private losses,” said the JP Morgan note.
The Macquarie report made a similar point but also pointed out that “unfortunately, the cost of not bailing out YES Bank for the economy and banking system is far higher than bailing out and hence under the current circumstances this looks to be the only option as investor interest in the stock is very low”.
The Back Story
Talks of a SBI-led rescue of Yes Bank have been doing the rounds for several days as the bank flailed in its capital-raising efforts. On March 3, BloombergQuint had reported that potential investors in Yes Bank are seeking participation from “sovereign banks” in any fundraising. This, the investors believe, would help reassure the bank’s depositors and safeguard any new investment into the lender, according to two people with direct knowledge of the matter.
Participation in fundraising also hinged on a relaxation in SEBI’s pricing guidelines, which are based on historical pricing and hence make it expensive for investors to invest in a company that has seen a substantial decline in stock price as Yes Bank has.
The Mumbai-based private lender has, for several months now, been seeking to raise capital. It’s first attempt at inducting new investors failed to pass muster. More recently Yes bank disclosed that it has received non-binding expressions of interest from JC Flowers & Co. LLC, Tilden Park Capital Management LLP, OHA (U.K.) LLP and Silver Point Capital, it disclosed to the stock exchanges on Feb. 12.
The bank delayed reporting third quarter earnings to March 14th. It is widely expected that by then the bank would need to have finalised the capital raise plan.
Watch | Experts weigh on the pros and cons of an SBI-led consortium buying Yes Bank stake.
This is a developing story.