SBI's fund infusion into YES Bank not a complete solution, say analysts

Unless quick remedy is stitched up, there's looming threat of YES Bank being forced into SBI's books

The State Bank of India (SBI) stock on Monday is not far from its 22-month lows. While the reasons for this are the same, concerns are a lot bigger now. The only difference is that, earlier, when SBI had to absorb its smaller associates, the lender knew exactly what it was looking at and had an idea of the pain ahead.
 
With YES Bank, neither is the case. While SBI’s shareholders, including foreign portfolio investors, insurance companies, and mutual funds (who hold roughly 36 per cent), know the bank is putting all its might to restrict investment to 49 per cent in the reconstructed YES Bank and that this money will strictly be classified investments, what irks them (and rightly so) is the worst-case scenario of SBI having to be more than just an investor in the struggling private lender.
 
SBI’s stock, which is down by about 15 per cent since last Thursday when probability of YES Bank bail-out first surfaced, also indicates the Street isn’t convinced of the lender’s ‘investment’ philosophy.

 
For instance, analysts at Centrum Research project that even if YES Bank turns out to be a Rs 11,760-crore investment, risk weighted assets, based on December quarter numbers, will increase by only 1.5 per cent, as investment will be weighted 250 per cent and hence, impact on SBI common equity tier-1 (CET-1) may not exceed 15 basis points.
 

SBI’s CET-1 stood at 10.18 per cent in the third quarter and the bank has stated it will maintain its capital adequacy ratio at least 0.5 per cent higher than regulatory level. But here’s the catch. Will Rs 11,760 crore of capital be adequate to absorb YES Bank’s questionable asset quality? Assuming 60 per cent of YES Bank’s loan book is susceptible to stress, analysts at ICICI Securities estimate further provisioning burden of around Rs 24,750 crore. SBI’s infusion will only partly solve the problem.
 
How successful SBI emerges in partnering other investors is the crucial piece of the puzzle. Also, Suresh Ganapathy of Macquarie sounds off that if the intention of placing YES Bank under moratorium was to preserve the interests of its deposit holders, whether SBI classifies YES Bank as investment is questionable.

 
“Had SBI merged YES Bank into itself, retail depositors would be happy to stay put with SBI. We are not sure that merely a restructuring scheme with several banks participating can solve the problem,” he points out.
For SBI, the size of hole that YES Bank can drill into its financials will depend on how fast it can convince other investors to join hands. Unless there is a quick remedy, it doesn’t take away the looming threat of YES Bank being forced into SBI’s books.