YES BANK, India Crisis and Lesson to We Nepalese Investors and Banking Industry

Visit any Economic News Channel and Online Portals and you find YES bank all over it. Yes, you heard and read it right. Yes Bank is in Crisis.

Panicked Yes Bank customers were seen queuing up at the bank's ATMs at various locations, but to no avail as most of the money-dispensing machines have no cash, after the Reserve Bank of India placed the crisis-hit lender under a moratorium.

Customers are also facing trouble because net banking services are not working and some even complained that their credit cards are also not working.

The India Government has recently put private sector lender Yes Bank under moratorium till April 3 and capped deposit withdrawal at ₹50,000 after severe deterioration of the bank’s financial position.

However, Yes Bank’s books show that warning bells had been ringing for more than a year. The bank went on a loan spree even as bad loans mounted. Meanwhile, depositors withdrew large amounts, resulting in the bank’s profitability nose-diving in the last two fiscals.

Loan Spree:

In the last five years, Yes Bank went on a loaning spree. Its total advances rose by 334% between FY14 and FY19, the highest rise among comparable banks in the period.

Bad loans multiply:

Many borrowers started defaulting. The bank’s Gross NPA% (loans overdue for >90 days) zoomed to 7.39% as of Sept. ‘19, the highest among comparable banks.

Low Provisions:

While bad loans piled up, Yes Bank did not make enough provisions in its profits. Its Provision Coverage Ratio in FY19 was 43.1%, the lowest among comparable banks. RBI says a PCR of >70% is desirable.

Confidence Drop:

Amidst the loan mess, customers withdrew large amounts, resulting in the credit-deposit ratio of Yes Bank crossing 100% (it lent more than what it received) in FY18, 19.

A credit-deposit ratio of 106% means a bank loaned ₹106 for every ₹100 it received.

Poor profitability:

The loan spree & high NPA meant poor profitability, gauged by Yes Bank’s sinking Return on Assets (RoA) (RoA = net income/ total assets). Graph shows year-on-year change in RoA.

For instance, Yes Bank's RoA in FY19 was 0.52, in FY18 it was 1.78. Thus the y-o-y change of -1.26 in FY19 is plotted in the graph.

Yes Bank’s y-o-y change of RoA sinked to -1.26 in FY19, the highest slump  among comparable banks.

Investors sensed trouble:

Though the bank’s troubles came as a shock to many, investors sensed it early. The bank’s stock price fell steadily in the past year.

Relevance to Our Nepalese Banking:

Here is the full picture with major indicators of the 27 commercial banks as of the second quarter of FY 2076/77:

Also, below is the table showing Aggregate of Loans and Advances made upto 2nd Quarter, FY 2076-77. The industry average loan disbursed is Rs 96.82 arba. 11 commercial banks have the loan portfolio above Rs 96.82 arba. (Q2, FY2076-77):

Also, the Nepal Rastra Bank published the annual macro-economic data for the year of 2019/20.

The point being, a bank does not go into crisis all of a sudden. It shows signs beforehand- we just need to properly analyze the data and disclosures made at frequent intervals.

Sadly, It has still been the tendency of most of we Nepalese stock investors to just see the percentage increase or decrease in various indicators of banks and financial institutions rather than reading the entire Quarterly or Annual Reports of these institutions.  Various useful disclosures are made compulsory by the regulatory body to be published with the quarterly and annual reports, but we give zero relevance and don’t bother to read those annexure.

The table in the reports just present us with the figures but the actual nature or matters that have significant importance related to those figures in the chart are found written in the notes and annexure attached below those data tables.

Say, for example, there may be huge provision amount in the report. Now, we need to see in the Annexures what the provision is actually for. It may mention about the litigation pending. Then , we need to know the case is winnable or a loss case as per Mgt. View. Similarly, there may be huge amount in Reserves but the distributable portion is very less due to the Regulatory Adjustments.

The news portals and the Online media related to this sector, where prices are highly sensitive to these reports, only make cheesy headlines during publish of quarterly or annual reports such as “ 102% rise in…..” or “EPS fell sharply by….%”.

Hence it is of utmost importance as an Investor himself /herself to go through the entire pdf of reports published of the stocks invested or potential future investments, be it from the news portals or the official websites of the co. itself,rather than driving sentiments and making irrational decisions based on the headlines appearing on your social accounts and media pages.

Knowing the reason for such performance of your company is equally important. May be, it is relevant to this quarter and it may reverse in Next quarter and you, as an investor, panicked at the moment itself without knowing the true reason. So, knowing whether the impact is short term or long term on the performance is equally and most important. Don’t you think so???

Say,for example, the Q2 report of a bank says huge provisioning due to bad loans. But the annexure or the CEO’s Interview says the bank has initiated legal actions against such defaulters and has attached the defaulter’s assets for recovery. So, till the next quarter the bank may get back its stuck money from those defaulters and accordingly, the report for the upcoming quarter is likely to improve, thereby improving your investment EPS and Expected Return.

Now, what if you did not read these annexure or additional info and sold your stocks just to find the price rise or huge dividend at the end of the year, wouldn’t you as an investor feel as if you have been fooled, that too by yourself, and no outsider?? Decide for yourself!!

Finally, to the fellow Investors:

-CA Ayush Khetan

ayushkhetan2007@gmail.com