Article

Yes Bank Sets Off Contagion Selling in the Stock Markets

06 Mar 2020

The news flows that came from Yes Bank on the morning of 05th March were drastically different from the news flows in late evening. In the morning, the Yes Bank stock rallied by over 25% after it was reported that SBI was expected to come in and support the bank with capital infusion. However, things took a turn when the RBI imposed a moratorium on Yes Bank at 8 pm on 05th March. Under the moratorium order, the Yes Bank board was superseded by an RBI appointed administrator and there were limits of Rs.50,000 withdrawal placed till April 03rd.

Why this move is impacting the stock markets?

Yes Bank is still a part of the Nifty 50 and also a player in the futures segment. The pressure is visible from the fact that as of 10.40 am there are more than 24 crore shares on offer but volumes have been just 1.30 crore shares as there are no buyers even at lower levels. Here is the impact.

  • UBS, a leading brokerage, has pegged the fair value of Yes Bank at around Rs.1, which effectively means it is worth nothing. That explains why there are no buyers in the counter despite the stock being nearly 45% down on 06th March.
  • Most people are worried about the impact that Yes Bank could cause to the markets considering the size of its balance sheet. As of March 2019, Yes Bank had total deposits of Rs.228,000 crore and now all that comes under moratorium. Yes Bank has borrowings of Rs.108,000 crore and that also creates a systemic risk.
  • The next problem could be at a brokerage level. Brokers and other investors who have borrowed against Yes Bank shares could face immediate margin calls. In addition, brokers have already been instructed to close out all outstanding positions in Yes Bank to avoid any market panic.
  • Then there is the collateral damage at two levels. Depositors may be forced to sell out other assets and shares to make up for the deposit locking of Yes Bank. This maybe evident in the next few days. Secondly, borrowers with loan sanctions fromYes Bank may have to look for alternative sources of finance.
  • The moratorium on Yes Bank raises some questions over other private banks that have been facing NPA problems in the past. For example IndusInd Bank, RBL Bank and Bandhan Bank have taken deep cuts in trading on 06th March. Other banks in the midst of a liquidity crunch like Lakshmi Vilas Bank are also on lower circuit.
  • Yes Bank was quite active in funding real estate projects and even NBFCs. Both these sectors will immediately feel the crunch as the funding sources dry up and that could also have a cascading effect. That is also evident in the stock prices.
  • Lastly, don’t forget the retail borrowing effect. As per the RBI announcement, any deposit made by an individual will only be paid after adjusting against the loans outstanding. This could create a major liquidity crunch among retail investors. In fact, the weak consumption that has been a major bugbear for the Indian economy could get worse if the situation is not handled quickly and effectively.

Yes Bank has already lost over 90% of its market value in the last one year and the sharp fall on 06th March only exacerbates the problem. The impact of Yes Bank on the Indian economy is likely to be much deeper than originally anticipated. A lot will depend on how quickly the administrator is able to put the house in order, infuse capital and bring stability back to the markets. The crisis is in the open; it is now about how it is handled!

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Yes Bank Sets Off Contagion Selling in the Stock Markets

06 Mar 2020

The news flows that came from Yes Bank on the morning of 05th March were drastically different from the news flows in late evening. In the morning, the Yes Bank stock rallied by over 25% after it was reported that SBI was expected to come in and support the bank with capital infusion. However, things took a turn when the RBI imposed a moratorium on Yes Bank at 8 pm on 05th March. Under the moratorium order, the Yes Bank board was superseded by an RBI appointed administrator and there were limits of Rs.50,000 withdrawal placed till April 03rd.

Why this move is impacting the stock markets?

Yes Bank is still a part of the Nifty 50 and also a player in the futures segment. The pressure is visible from the fact that as of 10.40 am there are more than 24 crore shares on offer but volumes have been just 1.30 crore shares as there are no buyers even at lower levels. Here is the impact.

  • UBS, a leading brokerage, has pegged the fair value of Yes Bank at around Rs.1, which effectively means it is worth nothing. That explains why there are no buyers in the counter despite the stock being nearly 45% down on 06th March.
  • Most people are worried about the impact that Yes Bank could cause to the markets considering the size of its balance sheet. As of March 2019, Yes Bank had total deposits of Rs.228,000 crore and now all that comes under moratorium. Yes Bank has borrowings of Rs.108,000 crore and that also creates a systemic risk.
  • The next problem could be at a brokerage level. Brokers and other investors who have borrowed against Yes Bank shares could face immediate margin calls. In addition, brokers have already been instructed to close out all outstanding positions in Yes Bank to avoid any market panic.
  • Then there is the collateral damage at two levels. Depositors may be forced to sell out other assets and shares to make up for the deposit locking of Yes Bank. This maybe evident in the next few days. Secondly, borrowers with loan sanctions fromYes Bank may have to look for alternative sources of finance.
  • The moratorium on Yes Bank raises some questions over other private banks that have been facing NPA problems in the past. For example IndusInd Bank, RBL Bank and Bandhan Bank have taken deep cuts in trading on 06th March. Other banks in the midst of a liquidity crunch like Lakshmi Vilas Bank are also on lower circuit.
  • Yes Bank was quite active in funding real estate projects and even NBFCs. Both these sectors will immediately feel the crunch as the funding sources dry up and that could also have a cascading effect. That is also evident in the stock prices.
  • Lastly, don’t forget the retail borrowing effect. As per the RBI announcement, any deposit made by an individual will only be paid after adjusting against the loans outstanding. This could create a major liquidity crunch among retail investors. In fact, the weak consumption that has been a major bugbear for the Indian economy could get worse if the situation is not handled quickly and effectively.

Yes Bank has already lost over 90% of its market value in the last one year and the sharp fall on 06th March only exacerbates the problem. The impact of Yes Bank on the Indian economy is likely to be much deeper than originally anticipated. A lot will depend on how quickly the administrator is able to put the house in order, infuse capital and bring stability back to the markets. The crisis is in the open; it is now about how it is handled!