Rana Kapoor, chief executive officer and managing director of Yes Bank Ltd., speaks during a news conference in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

Should Yes Bank Have Told Investors About The NPA Divergence Before Its QIP?

In the last week of March, Yes Bank Ltd. raised just under Rs 5,000 crore through a share sale to institutional investors. The shares were priced at Rs 1,500 a pop at the time of the qualified institutional placement (QIP).

Since then, Yes Bank has seen its shares slip to Rs 1,401 per share, even though broader markets have hit lifetime highs during this period.

What seems to have hit the stock is a series of disclosures that investors may not have anticipated.

On May 12, when the bank released its annual report, it emerged that the lender’s assessment of bad loans in 2015-16 differed widely from the Reserve Bank of India’s (RBI). According to a disclosure made in the annual report, the bank had disclosed gross non performing assets (NPAs) of Rs 748.9 crore at the end of March 2016. The RBI, however, thought the true level of gross NPAs was six times higher at Rs 4,925.6 crore. Following an April 18 circular, all banks must disclose any such divergence.

Yes Bank went on to explain in the annual report that most of this stress detected by the RBI had been dealt with in 2016-17. However, even at the end of March 2017, a divergence of Rs 911 crore persisted. As a result, the bank’s gross NPAs had doubled in the March 2017 quarter compared to a year ago.

Despite the bank’s explanatory comments, investors were unnerved as the disclosures suggested that the bank may be under-reporting bad loans. The stock corrected.

Yes Bank announced its earnings for the March quarter post market hours on April 19. In the next trading session, on April 20, the stock fell 3.76 percent.

On the day the annual report was made public the stock fell nearly 6 percent to Rs 1,483.10. Since then the stock has stabilized but is still trading below it’s QIP price.

Should Yes Bank Have Disclosed The Divergence To Investors?

That question can be divided into three smaller questions to understand the issue clearly.

Question 1: Did Yes Bank need to disclose that divergence to QIP investors?

The answer to that is no. Until April 17, there was no regulatory compulsion to disclose any difference in assessment of financials between the bank and the regulator. It was only on April 18, that the RBI released a notification which said that any such divergence must be disclosed in the notes to accounts.

“There have been instances of material divergences in banks’ asset classification and provisioning from the RBI norms, thereby leading to the published financial statements not depicting a true and fair view of the financial position of the bank,” said the RBI in its notification to explain why these disclosures had become necessary.

All banks, including Yes Bank, will now have no option but to disclose divergences from here on.

Yes Bank’s case, however, gets complicated by the fact that the lender has issued new shares to investors just a month before the notification.

Question 2: Did Yes Bank know of the divergence at the time of the QIP?

The answer to that question is unclear. The asset quality review by the Reserve Bank of India was conducted in the second half of 2015-16 and by the end of that financial year, the regulator had made an assessment of the true asset quality of bank books. In fact some banks had started recognizing some of the accounts considered as stressed starting the December 2015 quarter.

A senior banker that BloombergQuint spoke to said that banks had been informed of the divergence for 2015-16 between September and October 2016. Peer private sector lender Axis Bank, in its post earnings conference call, told investors: “As part of the risk based supervision exercise for 2016 which concluded in the third quarter of financial year 17, the RBI pointed out certain modifications in the bank's asset classification and provisioning as on 31st March 2016.” In the case of Axis Bank, the divergence was Rs. 9,478 crores.

Yes Bank, however, says that the final numbers were communicated to them after the QIP issue.

In response to an email query from BloombergQuint, Yes Bank said “the final numbers were provided to YES Bank only in April 2017; vide a “confidential” communication.”

When asked whether the bank had discussions with the regulator prior to April on the likely amount, the bank reiterated that the final divergence amount was received by the bank only in April and that this was discussed at the bank’s board meeting on April 19.

The regulatory requirement prescribed vide Circular dated April 18, 2017 are in public domain in terms of which the banks have been advised to make adequate disclosures in the Notes to Accounts to the Annual Financial Statements (specifically advising the manner for disclosing the “Divergence in Asset Classification and Provisioning for NPAs”, in the format prescribed). The Board of Directors of the Bank at their meeting held on April 19, 2017, made all appropriate disclosures in this connection and the Stock Exchanges were also intimated accordingly.
Yes Bank Statement

Question 3: If the bank knew that there was a material divergence likely between its assessment of bad loans and that of the regulators, should it have flagged off this risk to investors?

Proxy advisories think they should have.

JN Gupta, managing director at Stakeholders Empowerment Services, a proxy advisory firm, believes that Yes Bank should have disclosed the divergence before the QIP as a part of good corporate governance.

Assuming that they (Yes Bank) had the information of the divergence in NPA classification before the launch of the QIP, they should have disclosed it. It is a question of the risk factor. If it was an IPO (initial public offering), they would have been expected to make a disclosure.
JN Gupta, Managing Director, Stakeholders Empowerment Services

Amit Tandon, founder and managing director at proxy advisory firm Institutional Investor Advisory Services also believes Yes Bank should have stated the RBI’s estimate at some point before the QIP was launched.

In principle, this is a disclosure that should have been made. Not just in the case of Yes Bank. If the RBI communicates its estimates of a bank’s NPAs, the bank should ideally make a disclosure within two-three weeks. The RBI communicated this information to banks in September 2016. Why do banks have to wait till March 2017 to make a disclosure?
Amit Tandon, Founder & MD, Institutional Investor Advisory Services

Yes Bank’s Justification

In an earlier e-mail response to a query from BloombergQuint, Yes Bank also said that it had stuck to its credit cost guidance.

“The credit cost for FY16 was restricted to 50 bps vis-a-vis the original management credit cost guidance of 60-80 bps,” said Yes Bank.

Further, the RBI conducted its risk based survey in 2016-17 as well, and divergences that emerged from this were also fully accounted for in the credit cost for the year, said Yes Bank. The bank’s credit cost in 2016-17 stood at 53 basis points, at the lower end of its guidance of 50-70 basis points.