Never mind what happened to the Indian markets today. The nifty-50 fell 2.39% to end at 10599.25. Yeah it fell yesterday too. Let's keep the index story for another day. On 6 September, Yes bank traded at a high of Rs.347.80. On 20 August, at a high of Rs.404 per share. Things were looking alright for the bank until 21 September. The day before was a market holiday. On 19 September, the stock closed at Rs.319.20.
On the same evening, the bank reported that the RBI had rejected its request to extend the CEO's tenure by three years. The next trading day on 21 September, the stock tanked 29%, and closed at Rs.226.50 per share, equivalent of a loss of Rs.213 b in market value. Can one person be so important for a publicly traded, large banking business, or was it just the market's whims? The quantity traded on that day was over 293 m on the NSE, compared to the average of less than 30 m during the previous seven trading days.
As per this report of that fateful day, the bank was cited three reasons for the RBI's deadline for the CEO's tenure until 31 January 2019: Weak compliance culture; Weak governance; and Wrong asset qualification. The allegations seemed too brutal, and the bank made a new low of Rs.197.25 on 25 September when the board was to meet for the future course of action.
However, 28 September was more special when the stock quoted at Rs.165 at some moment, but closed the day at Rs.183.65 per share. The market capitalization of the bank stood at Rs.423 b, some 54% down from its August's high. Too much, too soon? Is the market crazy, or is there more to this?
As of June quarter, Yes bank had impressive performance to show: Gross npa 1.31%; Net npa 0.59%. Net npa, security receipts and standard restructured assets totaled 1.52%. Yet, herein lies the catch. If these numbers are good, at the current price of Rs.215 per share, the stock is trading at 2.15x its adjusted book, a reasonable price having potential to yield better returns in the next 2 to 3 years.
If the asset quality is worse than it is reported, it becomes a little complicated. The value becomes a function of how the book looks like. For instance, if the net asset quality is worse off to say, 3%, the current price becomes 2.50 times its adjusted book. If 5%, the price will be 3.19 times the adjusted book. Naturally, the returns will be impacted. That is why the management trust factor is so important when it comes to valuing banks.
The bank's capital raising plans have been held up because of the story that has unfolded. At the moment, therefore, the capital ratio is not the best which means the bank's near term growth will be somewhat subdued. After new capital, the bank should be able to move on to the growth path. Its return on assets (1.35%) and return on equity (16.40%) are pretty decent. There is a reason to believe that this should continue.
The bank's capital raising plans have been held up because of the story that has unfolded. At the moment, therefore, the capital ratio is not the best which means the bank's near term growth will be somewhat subdued. After new capital, the bank should be able to move on to the growth path. Its return on assets (1.35%) and return on equity (16.40%) are pretty decent. There is a reason to believe that this should continue.
On 1 October though the bank released its unaudited details for the latest quarter, and noted that its gross npa were stable compared to the previous quarter.
In the meantime, there is no dearth of recommendations:
Time will tell whether Rs.215 is a good buy, or a great buy, or something else. It looks like there is an opportunity here for the investors if they are willing to show some patience after picking it.
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