Brokerages flag capital risks for Yes Bank after SC order; stock falls nearly 4 pc

Yes Bank shares fell nearly 4% after the Supreme Court upheld the quashing of its ₹8,415-crore AT-1 bond write-off. Citi and Morgan Stanley maintained bearish ratings, citing potential pressure on the bank’s capital adequacy, net worth and book value 

New Delhi: Shares of Yes Bank on Friday traded nearly 4 per cent lower as analysts have turned cautious after the Supreme Court upheld the quashing of its Rs 8,415-crore Additional Tier-1 (AT-1) bond write-off, warning of pressure on capital and book value.

Analysts at global brokerage Citi maintained their sell rating on the banking stock and cut target price to Rs 17.50.

---

Similarly, Morgan Stanley retained its underweight rating with a target of Rs 17 following the verdict by the apex court, which triggered a sharp sell-off in the stock. The Supreme Court has dismissed appeals filed by Yes Bank, the Reserve Bank of India and the Centre against the Bombay High Court’s January 20, 2023 judgment that quashed the write-down of AT-1 bonds which were extinguished during the lender’s rescue in March 2020.

According to Citi, the reversal of the AT-1 bond write-down reopens capital-related concerns. The brokerage estimates the development could lead to a 250-basis-point reduction in Yes Bank’s Common Equity Tier 1 (CET1) capital ratio to 11.5 per cent, based on principal amount alone, assuming coupon payments are discretionary and non-cumulative.

The brokerage also expects the potential liability to erode the bank’s book value by 13-14 per cent, potentially necessitating a capital raise to restore capital buffers. The extent of final impact will depend on implementation of the ruling and treatment of outstanding bonds.

In addition, Morgan Stanley described the order as prima facie negative, saying it awaits clarity on what percentage of AT-1 bonds would ultimately be allowed to be written off. It estimates the post-tax amount of Rs 6,300 crore would represent around 12 per cent of Yes Bank’s net worth and could reduce its current CET1 ratio of 14 per cent by about 190 basis points.

The brokerage said the AT-1 bond issue had remained an overhang for the stock and it will watch for any review petition and further clarification from the bank.

A key question of Morgan Stanley is whether the decision fundamentally challenges the loss-absorption feature of AT-1 bonds or is primarily related to the process followed by the administrator during Yes Bank’s reconstruction. Meanwhile, Yes Bank shares declined as much as 3.85 per cent to Rs 17.45 on the BSE by 12:30 pm on Friday. The banking stock hit the lower circuit of Rs 18.03 on the BSE on Thursday.