There is no smoke without fire! So, there is a reason for the constant hammering of private sector lender YES Bank in the stock market. This capital-starved bank, once a darling of investors, has become a victim of speculations because of low liquidity, leverage and capital ratios. The bank today issued a statement assuring its customers once again. "The bank's overall capital adequacy ratio is comfortably above the regulatory requirements and all efforts are being made to financially strengthen the bank even further," it said.
In the last one year, the bank has come under lot of pressure because of the sudden exit of promoter Rana Kapoor, asset quality deterioration, NPA divergences and lower capital levels. The once fastest growing bank has seen its stock fall from Rs 585 per share to Rs 40 in just a year's time. The market capitalisation is also very low at Rs 10,150 crore. Let's look at three key parameters, which investors are looking at closely:
Liquidity Coverage Ratio
The liquidity coverage ratio tests the bank's short term resilience to any market event impacting the liquidity. A higher ratio shows that the bank has enough liquidity or high quality liquid assets to survive any cash outflow situation ( via deposits, etc.) over the next one month in any extreme stress condition. A liquidity coverage ratio of 100 per cent is the minimum one should have at any point of time. YES Bank has a liquidity coverage ratio of 113.83 per cent as on September 30, 2019. This is slightly above the 100 per cent, but not the best. Private sector banks like HDFC Bank and Kotak Bank have a liquidity coverage ratio of over 120 per cent. Take for instance HDFC Bank, which had a much higher liquidity coverage ratio of 132.53 per cent, while Kotak Bank had a ratio of 120.70 per cent in September 2019.
The leverage ratio is a measure of bank's core equity capital to its assets in the books. Higher the leverage ratio, better it is for the institution because they can easily liquidate the assets in cases of a crisis. The private sector YES Bank has a leverage ratio of 8.36 per cent. HDFC Bank has a leverage ratio of 10.82 per cent. Kotak has a leverage ratio of much higher 14 per cent. The RBI has recently reduced the minimum leverage ratio requirement to 4.0 per cent for systemically important banks and 3.5 per cent for other banks.
Common Equity Capital
The common equity Tier-1 capital of YES Bank is very low at 8.7 per cent in September 2019. The regulatory requirement is also around 8 per cent. The bank is at a risk of falling below the regulatory requirement in case of any provisioning pressure in its asset quality. HDFC Bank has a common equity Tier-1 capital ratio of 15.33 per cent, which is very high. Similarly, Kotak Bank has a common equity of 18.53 per cent. YES Bank, however, has a plan to raise funds up to Rs 10,000 crore, which was cleared in last week's board meeting. The new capital if it comes would certainly improve these three key ratios of the bank.