The Yes Bank fiasco made all the other smaller private banks look bad. We think, unfairly, which is the point of this post.
Yes Bank had undisclosed NPAs. After repeated failed capital-raising attempts, RBI stepped in and placed a moratorium. And that scared depositors.
We’ve covered Yes Bank extensively starting 2017. So here’s a thread for convenient access.
Here’s a thread on our comprehensive analysis of @YESBANK by @deepakshenoy and team, as events have unfolded going all the way back to 2017.
— Capitalmind (@capitalmind_in) March 17, 2020
The fallout of the Yes Bank saga. Rumours about the health of other private banks. RBL and IndusInd, among others.
RBL even came out with clarifications that depositors money is safe. But the rumours have refused to die down.
RBL bank admitted 3% of its institutional deposits have been withdrawn. These include state governments. It’s one thing when retail depositors panic, but when institutional depositors did too, we had to look deeper.
So, are RBL and Indusind deposits safe?
RBL Bank
RBL in its latest press release on results has stated that it has Rs 62,907 Cr as deposits and Rs 59,635 Cr as loans.
As of Dec 31st 2019, bank has investment of Rs 19,100 Cr of which high-quality liquid assets stood at Rs 16,300 Cr. The bank has also maintained Tier 1 Capital of Rs 10,200 Crs.
According to Sep-2019 results RBL has a balance with RBI to the tune of Rs 3,600 Crs. Also it has Rs 2,800 Cr as balance with the bank for money at short notice. The number might have slightly deviated by now, but on a baseline, it would have still maintained roughly Rs 5,000 Cr as cash in hand and balances with RBI.
All in all, RBL has liquidity of roughly Rs 33,000 Cr. It needs another 30,000 Cr to cover depositors’ money. For that, it can (easily) sell its Rs 59,635 Cr loan book at a discount of 50% and get the Rs 30,000 Cr for immediate disbursal.
RBL augmented its Tier 1 capital by raising Rs 2,025 Cr via QIP at Rs 351 per share in Dec 2019. In the same quarter RBL raise another Rs 675 Cr via QIP by offering shares at Rs 340 per piece.
All in all, RBL Bank looks healthy.
IndusInd Bank
IndusInd has a loan book of Rs 2,07,500 Crs and a deposit book of Rs 2,16,713 Crs.
The bank has a tier 1 capital of Rs 33,162 Crs and High-Quality Assets of Rs 52,721 Crs.
Indusind has another Rs 11,350 Crs balance with RBI and another Rs 9,500 Cr as cash in hand.
This coves nearly cover 50% of deposits. The balances are apart from some 8,000 Cr other investments and another 19,000 Cr fixed and other assets. And the rest 50% can be covered by selling the loan book.
Even at a 45% discount, Indusind will have enough cash to cover all the deposits.
So, What Can Go Wrong?
NPA’s Rising by Substantial Levels
Yes Bank had substantial amount of liquidity for paying its depositors. A drastic increase in NPA’s sent things spiralling. A huge increase in NPAs will require a proportionate amount of provisions. These provisions will eat away Tier 1 capital.
RBI currently has mandated the Banks to maintain at least 7.38% as CET1 capital. CET1 and additional Tier1 capital together make up for Tier1 capital. Once the level is breached, the banks need to raise more money to plug the gap or else RBI will step in and put the bank under prompt corrective action framework (PCA).
RBL and Indusind have currently CET1 ratio of 14.6% and 12.80%. Well above the 7.38% benchmark. They have substantial cushion to cover a sudden rise in NPAs.
If All Depositors Start Withdrawing
If the depositors start taking out money, then banks will first liquidate their high-quality liquid assets (HQLA). Then, they will try and use the cash balances and other investments. When those limits are hit is when RBI steps in and puts a moratorium around withdrawal limits.
Banks also need to time to sell their loan portfolios. This is not an easy task. The buyer will also want to check all credit history. So until a substantial chunk is liquidated and put aside for depositors withdrawal, RBI will keep imposing moratoriums.
Panic withdrawals at such times only worsen the situation.
The BBB and Below Book
RBL has nearly 6.1% of its advances in BB+ and below (meaning they have very high probability of slipping into NPAs). 6.1% of the current loan book turns out to be roughly Rs 3,600 Cr.
Source: Investor Presentation
Let’s assume that half of that turns into NPA i.e nearly Rs 1,300 Cr. Considering a 100% provisioning still leaves RBL with enough Tier 1 capital to meet the RBI benchmark. Currently, RBL bank has a CAR of 15.66% with a Tier 1 capital of 10,200 Crs
In case of Indusind we believe nearly 4-5% (Chart is not clear) of the book is below investment grade. 5% of the loan book turns out to be Rs 10,000 Cr.
Source: Investor Presentation
If we assume 50% of that turns out to be NPA i.e Rs 5,000 Cr. Even with 100% provisioning, It will not make a enough dent on its Tier 1 capital to worry about.
Indusind will still be able to meet the RBI benchmark of 10.88% CAR. Currently, Indusind has a CAR of 14.70% with a Tier 1 Capital of 33,132 Crs.
Why It’s Different This Time
The problem with Yes bank was under-reported NPAs. Even after RBI did an audit and asked Yes Bank to report the divergence as NPAs, Yes bank pretended like they did not exist. [we wrote about this too. find it in the tweet thread above].
Yes Bank was a ticking time bomb. It was a question of ‘when’, not ‘if’.
In Q3FY20 results, their gross NPAs jumped to 18.87%, from 7.39% in Q2FY20. Not because 11% of their loan book suddenly defaulted. They just finally decided to report things as they were, well mostly.
RBL and Indusind are different. They have their NPA problems, but we don’t expect them to balloon 2x overnight. Any potential impact will be to their profitability, not their survival.
The Side Effect of Yes Bank Fiasco
Bank failures are not like regular corporate failures. Banks going bust shakes depositor trust. Even RBI guarantees don’t seem to count for much when that trust is in short supply.
More deposits Coming In PSU Banks
Customers will still need to maintain deposits. When in doubt, they will prefer PSU Banks, since the biggest promoter, the Government of India can’t afford to let them go bust. That’s the perception. In reality, both private and PSU banks are regulated by the RBI.
PSU banks are already sitting on deposits without lending out. Advance growth for PSU banks has been flat or negative for the most pat of the year. More deposits will only result in money being parked with RBI rather than coming back into real economy.
Smaller Private Banks Cost of Funding to Increase
The major difference between banks and NBFCs is, banks can take deposits and NBFC cannot. Fixed-term deposits along with current and savings account (CASA) gives banks access to low-cost funds.
With panic around private banks, the only way to retain depositors is by bringing awareness and increasing deposit rates. Awareness will take time, but temporarily raising the deposit rates will lure the depositors to stay put.
This might increase the funding cost small private banks but will not make much of dent on their profitability as their NIMs are comparatively high enough.
Bottomline: RBL Bank and IndusInd Bank are not at the precipice Yes Bank kept stepping back towards. We don’t think there’s a credible risk of them going the same route. Banks operate on depositor confidence. In their case, even if that gets shaken, they take a hit to the bottomline and live to fight another day. Depositors in these banks can rest easy. Shareholders, might take a while before they have reason to celebrate.
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