Yes Bank Analysis 2019-06-07

Yes Bank is in top of the business news for last few days. Its stock price has dropped from around Rs 350 a year back to around Rs 150 now. Lets try to dissect what is going wrong with Yes Bank.

Figure 1 (Balance Sheet)

Lets first look at the balance sheet of Yes Bank declared in Mar Quarter of 2019 (Figure 1). You would notice that its Equity/Total Asset (standalone) = (463.01+26424.40)/380859.61 = 7%

Its Total Equity = 26887 cr 

Figure 2 (P&L)

Now lets look at its P&L for Mar-19 (Figure 2). 

Its gross NPA = 7882 cr (3.22% of total asset)

Its net NPA = 4485 cr (1.86% of total asset)

Figure 3

Now lets look at figure 3. You would notice here that 7.1% of their total asset has the rating of BB and Below which is a significant increase from 2.5% in Dec-18 quarter. What it really means is that a lot of their assets have been downgraded recently. The problem here is that they have not given out any more details of the asset quality like who are their major account and how those account's are doing neither they have given out more information  about who are those accounts which have been downgraded in last one quarter. 

For all the information about their downgraded account you will have to rely on new reports. Upon doing some google you will realize that bulk of that exposure is on Anil Ambani's ADAG, Essel Group, ILFS and DHFL and we all know what is their current situation. 

If I use the number from Figure 2 then if 3.22 % of NPA is = 7882 cr which means that 7.1% = 7.1/3.22*7882 = 17380 cr

Hence current gross NPA + BB and Below graded asset = 7882+17380 = 25262 cr 

25262/26887 (total equity)= 94% of total equity is equal to Gross NPA + BB and Below graded asset

So even if lets say (best case scenario) only 50% of the 7.1% BB and below graded asset gets defaulted then that means = 7882+17380/2 = 16572 cr which is 16572/26887 = 62% of total equity.

Hence in summary what we can conclude here? Even if 50% of Yes Bank BB and Below graded assets become NPA on top of its current gross NPA that is sufficient to wipe out 62% of their total equity. To make things worse assume what will happen if more of their assets will be downgraded in future?

So far we have talked about the issue with their asset which is where the devil lies in case of most of the financial institutions who tries to make money out of their highly leveraged balance sheet (just take Yes Bank as an example where the total equity is just 7% of total liability).

Now again to make things even worse lets again look at their income statement (figure 2). Look at its other income which has come down from 890 cr in Dec-18 to 531 cr in Mar-19. Lets see what is happening with their other income in the below chart

Figure 4

Here in the commentary section they have pointed out that out of the total drop 100 cr is because of one time reversal of banking fee. In addition to that you can see that from Q1FY19 the banking fee is consistently dropping down and they have not given any good reason for this consistent significant drop. To top all that an even bigger problem is with the aggressive accounting rule which they were following earlier which will be clear if we read the below comment from ICRA on their rating report they published on 3rd May

Figure 5

Here in figure 5 we can clearly see that Yes Bank was practicing upfront recognition of fee income. What does this really mean? If they were earlier practicing aggressive accounting practice for fee income that means there is a very high probability that they must be practicing it for many other account lines. We know based on history that whenever company has followed aggressive accounting policy they never did it with good intent and in most of the cases it was the investor of the company who has to pay for it. 

I would like to thank you if you have read my analysis upto this point :). I would be very happy if you can give me your feedback and point out anything important which I have missed here. 

Video version of the analysis https://www.youtube.com/watch?v=ODr3zMWCdw0&t=155s

Regards

Team Arthavriksh