In today's newsletter, we take stock of Yes Bank and figure out how the company has fared in the past couple of years.

Spoiler Alert: It has been a roller coaster ride.


Testing Times

So before we get to the meat of this story, we need to do a quick recap.

Two years ago, Yes Bank was a banking hotshot. It held so much promise that many people thought it would go on to become one of the largest private banks in India. Investors loved the company. Customers were happy and the man leading the bank, Rana Kapoor could do no wrong. Until that is, the RBI refused to let him continue as CEO. The company’s stock price tumbled.  Investors couldn’t figure out why he was being ousted. And Yes Bank lost 22,000 Crores in a single day of trading.

There were rumours that the company might have been underreporting bad loans. The skeletons were now tumbling. There was a new CEO in town. But despite his most optimistic assessment, Yes Bank seemed like it was destined to lose money. This was partly because almost all of the company’s loans went to large corporates. And the Indian corporate sector was in a spot of bother. As these companies began to default, it was dawning on Yes Bank that a significant chunk of money that they gave out as loans was unlikely to be paid back in full. This eroded invested confidence further and Yes Bank continued to take a beating in the markets.

You are now up to speed.

However, this is only half the story.

The other half involves asking “ Where does Yes Bank go from here?”

Just a few days back the company declared results for the 2nd quarter of this financial year and they were bad. Much worse than street expectations. Normally it wouldn’t have been much of a problem. Banks do mess up every now and then. But eventually, they manage to dust themselves and get back up on their feet. However, Yes Bank is walking on dangerously thin ice.

Normally banks are mandated to save some money as additional buffers to ensure that they can pay their dues and conduct business without hiccups. But all those unpaid loans Yes Bank accumulated in the past are now eating into the company’s safety buffers.

Think about it. For Yes Bank to script a turnaround they have to start doling out more loans. But they can only do that if they have enough money sitting idle. One way to mobilize these funds is to go out there and borrow money from outside investors. But that has been difficult considering these good folks have been unwilling to part with their cash post the NBFC crisis. The other alternative is to start collecting more deposits. As more money starts flowing into the bank by way of said deposits, banks get access to funds that can then be used to create more loans. However, with trust fast eroding, deposits have taken a hit as well.

And that leaves us with one final alternative. Get the money in by selling a part of the company. This way the bank will have no obligation to pay interest on the funds collected and the entire corpus can be used to shore up the safety buffer and start offering more loans.

So it should come as no surprise that Yes Bank has been trying to do just that. A couple of months back they raised close to 2000 Crores by selling stake in the company. But this isn’t enough. Yes Bank needs a lot more money. How much you ask? A cool $3 Billion dollars would be nice. And the CEO has been assuring everyone that they have outside investors waiting on the sidelines to come in and invest any moment now. Unfortunately, the identity of this mysterious investor keeps changing every now and then. First, it was some IT giant, then a payments company, and now, some family office with deep pockets willing to put up $1.2 Billion dollars upfront. Apparently the bank is likely to close this deal by the end of the year.

Anyway, even if someone does come in and offer monetary support, existing investors will have to forego significant ownership (~10%) in exchange for this capital. Will the RBI approve the deal? We don’t know. Will shareholders back this arrangement? We don’t know. Will Yes Bank be able to use this money and rise like the phoenix?

Hopefully, it does. But for now, it’s safe to say that nobody really knows anything for sure. So i guess we will just have to leave it at that.

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