Infuse capital in YES Bank; acquiring it will be disaster: Analysts to SBI

Shares of State Bank of India (SBI) witnessed a knee-jerk reaction and slipped over 5 per cent in the intra-day session on Thursday after media reports suggested the government may ask the bank to form a consortium and pick a stake in the beleaguered private lender, YES Bank. The stock, however, recovered later. YES Bank, on the other hand, zoomed over 29 per cent on the expectations that move will provide much-needed stability and capital to the bank.

Although the details of the development are yet to be out, Business Standard spoke to a few analysts to ascertain what this means for SBI, YES Bank, and the entire banking space.

Most analysts believe it is a positive step for the Indian financial sector as the the government has tried to avoid a repeat of IL&FS-like crisis and has saved the depositors. They, however, believe that the wise decision will be to ask SBI to form a consortium and provide capital as it would be disastrous if SBI were asked to merge with YES Bank, given its poor asset quality.

The move is a positive step for the financial sector as a whole. By this, the government has tried to avoid a repeat of IL&FS-like crisis and has saved the depositors, said AK Prabhakar, Head of Research at IDBI Capital. "While we know that YES Bank has a huge pile of bad loans, SBI is the only bank that has the capacity to absorb it. Compare it to any other public sector bank, SBI is the most suitable bank to take up YES Bank. On the contrary, YES Bank's loan book is 10 per cent of SBI. If nothing else, the move will improve the credit book of the merged entity," Prabhakar added.

From the investment point of view, analysts advise retail investors to be cautious.

"Though we may see a big spike in price of Yes Bank and negative reaction in price of SBI, we recommend caution to retail investors. The critical thing to watch would be percentage dilution of equity taking into consideration the conversion of existing bonds issued by Yes Bank into equity," said Abhimanyu Sofat, Head Of Research, IIFL Securities.

Sudip Bandyopadhyay, group chairman at Inditrade Group of Companies, says "something was required to be done as the entire YES Bank saga has been going for a very long time. The bank needs to be capitalised and they were not able to infuse capital. March 14 is the deadline for the bank to declare their results and the expectations are rife there will be significant provisions required which could drag the net worth and capital adequacy of YES Bank significantly lower than the permissible level. It would have created a significance chaos. "

Under the circumstances, the permission given by the government to SBI to step in and bring in some stability by providing capital is good for the market and overall banking space, the analyst added.  

Adding, "I don't think the government's intention will be to merge YES Bank with SBI or ask SBI to acquire YES Bank as that would be disastrous."

Echoing similar views, RaviKant Bhat, Banking Analyst at IndiaNivesh said the move is a positive development for YES Bank as there has been lot of speculation on how much capital it would manage to raise and its fate if not able to.

"This is a good development and much better than an outright merger with SBI as that would have created huge operational issues. For instance, merger of IDBI and IDBI Bank created several operational issues and affected functioning of the merged entity. So, this appears the best possible solution in the event YES not managing to raise equity on its own. SBI, and other investors, might be able to pool in a meaningful equity and that should be sufficient for YES Bank, at least, for the next few quarters to absorb stress and reorient its balance sheet towards growth which has been shrinking since last few quarters," Bhat added.

Over the past one year, shares of YES Bank have nosedived a whopping 88 per cent against over 2 per cent rise in the benchmark Nifty50 index.