Private sector lender YES Bank is all set to launch fresh equity shares in the market via follow-on public offer (FPO) worth Rs 15,000 crore today. The issue will close on July 17. The price band of the issue is fixed at Rs 12-13 per equity share, a discount of about 50 percent to its July 10 closing price.

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Investments Before the FPO

State Bank of India (SBI) had earlier agreed to invest Rs 1,760 crore in the FPO investment. Even anchor investors infused Rs 4,098 crore on July 14 (a day before the FPO). All 12 anchor investors placed their bids for 3,41,53,84,614 equity shares at the lower end of the price band of Rs 12-13 per share.

Bay Tree India Holdings I, owned by Tilden Park, was the largest anchor investor, investing Rs 2,250 crore in YES Bank for an allocation of 1,87,50,00,000 shares.

Why FPO Route?

YES Bank has remained in a chaotic situation for quite few years after the lender started giving out easy loans. After the YES Bank founder Rana Kapoor fiasco, the lender began to look for funds but couldn't raise it. Finally, Centre devised a reconstruction plan for the bank in March this year, where couple of domestic lenders like SBI, HDFC, ICICI Bank, Kotak Mahindra Bank, Bandhan Bank and two others invested a total of Rs 10,000 crore in YES Bank.

Most analysts believe the FPO route is a viable option given the current situation in the economy due to COVID-19. Some of them see the issue as an opportunity due to its hefty discount, most believe to stay away.

Experts' View

According to Sudip Bandhopadhyay of IndiTrade Capital, there will be a gap between existing shareholders and future shareholders given SBI's shareholding will come down.

"There are two primary reasons for the disinterest amidst investors'. First, there is a doubt regarding the bank's books and its valuations. Second, investors have better options to invest in quality banks with attractive valuations and book," said Bandhopadhyay further.

Nirmal Bang in its report maintained its earlier view on YES Bank, and recommended 'avoid' on the FPO.

The brokerage agreed that the issue is priced cheaply, but remained uncertain on the valuations. It feels that more clarity on the numbers and the future trajectory of the bank will help in bringing some clarity to make a better decision.

It said, "FY21 could be a year of loss for the bank even as the underlying structure and business strategy changes. At the current juncture, our biggest concern with YES Bank is the high level of stress, especially in such a fragile environment."

A confluence of high slippages, elevated write-offs and a flat loan book is unlikely to change the asset quality picture for good in the near term, it added further.

Jaikishan Parmar, senior equity research analyst, Angel Broking recommended 'neutral' stance on the FPO.

He said, "At the upper end of the price band, YES Bank demands adjusted P/B of 0.85x post considering FPO. In current market, other banks are trading at attractive valuation of FY20 net worth viz. IDFC Bank (0.9x), SBI (0.5x), Federal Bank (0.9x). Our concern for YES Bank is fresh formation of bad loans that would keep provision high and return ratio compressed for longer time."

Parmar further pointed out that rebuilding CASA and deposits is a challenging task. Overall, the bank’s revival and achieving decent RoE numbers will take longer time.

According to some traders, the risk-reward ratio seems unfavourable. Also, the three-month moratorium remains a concerning factor for the Street as it will build pressure on their loan book. However, Samco Securities recommended 'subscribe' on the FPO.

It feels that the backing of SBI is worth taking the risk. It further added, "Investors with high risk appetite and comfortable liquidity position with ability to hold for minimum 2-3 years can invest in this high-risk high-reward issue."