The phrase 'excess of everything is bad' suits well the beleaguered YES Bank whose capital base is expected to be one of the highest in the banking industry post the successful completion of its Rs 15,000 crore follow on public offer (FPO).
The private sector bank has no option but to raise large sum of capital because of its inadequate equity capital of Rs 2,510 crore to take the load of higher NPA provisioning, deteriorating asset quality and the capital for future growth.
While many private banks like Kotak Mahindra Bank and HDFC Bank, well stocked with capital, are raising 'confidence' capital, the YES Bank is in the market for 'rescue' capital.
The private bank, which faced the RBI moratorium earlier this year, has already breached the regulatory requirement fixed by the RBI regarding maintenance of CET 1 (core common equity ) and tier-1 capital. The bank's CET1 and Tier 1 ratio stood at 6.3 per cent and 6.5 per cent, respectively as against the RBI's minimum requirement of 7.3 and 8.8 per cent, respectively for 2019-20.
The fresh capital will be enough for the bank to carry on for the next two years. But the bigger challenge is to bring back the depositors, scale up safe and secured retail banking where margins are low and selectively explore high-yield corporate banking.
In fact, the excesses in the corporate banking, where it chased high yields or returns, is what pulled the bank down.
Six months ago, YES Bank had an equity capital base of less than Rs 500 crore, which was the optimum level. But the rising NPAs and provisioning pressure left the bank with inadequate capital. New investors -- SBI and other banks -- bailed it out with fresh capital which increased the equity capital base to Rs 2,510 crore.
Post the current FPO, the bank's new equity capital may settle around Rs 5,000 crore-plus. The only bank with a high equity capital is IDBI Bank with Rs 10,380 crore. YES Bank will probably sit with second highest capital in the bank. IDBI Bank which had high NPAs was also bailed out by the LIC.
Going forward, the big challenge for the private bank would be to service such a large equity capital base. The shareholders always look for high returns in terms of dividend and capital appreciation. The capital appreciation is also a function of high growth and high yield in the business.
Take, for example, Kotak Mahindra Bank which got the banking licence around the same time as YES Bank, operates with an equity capital of less than Rs 1,000 crore. Similarly, HDFC Bank , which has become the largest private bank in the country in terms of balance sheet size, operates with an equity capital of just Rs 548 crore. ICICI Bank and Axis Bank have equity capital base of Rs 1,294 crore and Rs 564 crore, respectively.
The Rs 15,000-crore issue will result in dilution of the shareholding of all the investors by nearly half assuming successful completion of the equity offering and the existing shareholders not participating in the issue.
YES Bank's FPO opens tomorrow for subscription. The equity shares at a face value of Rs 2 per share are offered at a floor price of Rs 12 per share with a cap of Rs 13 per share, which is at a discount to market price of Rs 20 per share.
The current market price also doesn't reflect the true price as the existing investors of the bank have a three-year lock-in period on 75 per cent of their shareholding. The lock-in restricts the selling pressure and distorts the market price.