Yes Bank's new board has listed out six reasons for additional capital infusion of Rs 15,000 crore. The bank's top brass include ex-PNB chairman Sunil Mehta as non executive chairman and former SBI MD Prashant Kumar as CEO & Managing Director. Yes Bank appointed new board and CEO after Rs 10,000 crore capital infusion by the State Bank of India (SBI) and half a dozen other banks earlier this year. The bank will need around Rs 5,000 crore immediately. Here is why the money is needed:
New NPA landmines post coronavirus
Nationwide lockdown since March last week has opened new NPA landmines in sectors like real estate, transportation, tourisim, hospitality, aviation, MSMEs and unsecured retail loans. The bank has to prepare for new set of NPAs post August when the six-month moratorium period ends. There are likely to be slippages from the moratorium accounts.
Improving Core Equity Capital
The rising gross NPAs at 16 per cent plus and the requirement to keep a higher provisioning coverage ratio (PCR) at 73 per cent against the stressed loans have consumed most of the existing capital. The CET1 ( common equity Tier 1), is currently at 6.3 per cent, which is lower than the RBI-mandated 7.3 per cent. In fact, the bank risks RBI action if the CET1 goes below 5.5 per cent. If the additional capital doesn't come, this might happen for real.
Managing Liquidity Issues
The bank's deposit base has been shrinking for the last two years as the asset quality troubles started for the bank with huge NPA divergences. In the last six months ending March 2020, the bank's deposits have reduced from Rs 2.09 lakh crore to Rs 1.37 lakh crore. Banks with weak balance sheets are getting impacted as depositors shift to stronger banks. Secondly, the six months moratorium has impacted the bank's cash flows because of deferred EMIs. This will create a liquidity issue in the near future.
Bolstering investment sentiments
The entry of new investors like SBI has created a positive sentiment, but lot needs to be done to bring back the bank to normalcy. Credit rating agencies are monitoring the beleaguered bank very closely. Depositors that are still with the bank don't want any more surprises. The employees, too, need to be assured of their future. Investor community too wants to see the bank with comfortable capital given the current uncertain environment. Many well capitalised private banks are already building buffers by raising capital to prepare for a worst case covid scenario.
Capturing Future Growth opportunities
The bank also needs capital for growing the loan book, especially retail lending, which is safe and secured. There will be opportunities to lend in a post covid world to a variety of businesses from small to large.
Improving cost of capital
As they say, nothing comes for free, investors of the additional capital expect returns by way of dividends and appreciationof their capital. Currently, since the bank is incurring losses its return on equity (RoE) as well as return on assets (RoA)are negative. The bank has to get back to generating returns or at least the investors want to see a credible road map of a targeted RoE or RoA in the next 3-5 years.