Yes Bank Faces Rs 6,300 Crore Blow After SC Verdict on AT1 Bonds
JM Financial warns Yes Bank faces a Rs 6,300 crore hit and lower capital ratios following the Supreme Court's ruling on AT1 bonds.
The financial stability of Yes Bank is under the scanner following a critical Supreme Court ruling regarding the write-down of Additional Tier-1 (AT1) bonds. According to a research report by JM Financial, the legal setback is expected to severely impact the bank's profitability and weaken its capital position.
The Cost of the Supreme Court Ruling
The Supreme Court, on October 15, upheld the Bombay High Court's decision to set aside the bank's write-down of AT1 bonds worth Rs 8,400 crore. This legal turn of events has significant financial implications. JM Financial estimates that the post-tax impact on Yes Bank's profitability could be approximately Rs 6,300 crore.
Beyond the immediate profit hit, the brokerage warns of a decline in the bank's Common Equity Tier-1 (CET1) capital ratio. It is projected to drop by around 230 basis points, bringing it down to 11.4 per cent.
Accounting and Cash Flow
Interestingly, the brokerage noted that while the reinstatement of these AT1 bonds will be recorded through the profit and loss statement, it will not result in an immediate cash outflow for the repayment of the principal amount.
Mixed Financial Performance: Growth vs. Risk
Despite the looming shadow of the AT1 bond issue, Yes Bank's recent quarterly results showed strong growth on the surface. For the second quarter of FY27, the bank reported a 65 per cent year-on-year surge in net profit, reaching Rs 1,080 crore. This growth was primarily driven by a lower requirement for provisions and an expanding balance sheet.
- Net Interest Income: Rose by 22.7 per cent year-on-year to roughly Rs 2,822 crore.
- Advances: Grew by 23.7 per cent to reach Rs 3.09 lakh crore.
- Deposits: Increased by 19.5 per cent year-on-year, totaling Rs 3.54 lakh crore.
Red Flags and Future Concerns
While the numbers look positive, JM Financial has pointed out several underlying risks. A major concern is that deposit growth, when excluding foreign currency non-resident deposits, has been largely fueled by wholesale funding rather than retail growth.
Furthermore, the bank's net interest margin declined sequentially by 10 basis points to 2.6 per cent. This was influenced by a 12-14 basis point drag caused by foreign currency deposits.
The brokerage also raised alarms regarding:
- Future recoveries from security receipts.
- Potential obligations related to AT1 coupons.
- A heavy reliance on income generated from third-party distributions.
Revised Outlook and Target Price
Factoring in the exceptional impact of the AT1 bonds, JM Financial now projects a net loss of approximately Rs 2,093 crore for FY27. Consequently, the brokerage has slashed its 12-month target price for Yes Bank from Rs 22 to Rs 17, while maintaining a 'Reduce' rating.
On the other hand, Yes Bank's management remains optimistic, expecting margins to recover starting from the fourth quarter. The bank has also indicated that it is currently evaluating various options for raising capital to strengthen its position.