Private equity group Carlyle is considering a Rs 3,750–4,500 crore ($500-600 million) investment in Yes Bank along with peer Advent International, according to people in the know.
The lender is in talks with the private equity (PE) investors to raise Rs 7,500-11,250 crore ($1-1.5 billion) of growth capital to further bolster its balance sheet two years after the regulator put it under stewardship of the State Bank of India to stave off a possible run on its deposits.
The bank’s board, on January 21, 2021, approved a proposal to raise Rs 10,000 crore through modes including qualified institutional placements and foreign currency convertible bonds. That approval was to lapse on February 22, 2022.
Yes Bank has not been successful in attracting investors so far. In late December, the board approved an extension of the earlier proposal to raise capital in the form of equity, bond, warrants or any other equity linked security.
The proposed investment by PE investors via preferential allotments could be similar to Bain Capital’s 2017 investment in Axis Bank that saw the Boston-based PE major lead a consortium that pumped in $1.8 billion to help shore up Axis Bank’s capital base after a string of disappointing earnings.
Both Advent and Carlyle are in advanced stages of their diligence and are looking at finalising terms by the end of this month. The exact quantum of investments would then be finalised, sources added.
Current regulations allow non-promoters such as private equity players to buy up to 9.9% in banks, subject to approval from the Reserve Bank of India (RBI). Yes Bank’s current market capitalisation is Rs 32,596.47 crore. A 10% stake in the bank would thus be valued at Rs 3,259 crore. Both PEs are looking to each own 10%, with board representation.
However, if the stock price surges, deal contours may get altered and potentially derailed as well.
ET, in its February 4 edition, was first to report that Advent was negotiating with Yes Bank and SBI for a capital infusion and a second bulge-bracket financial investor was likely to co-invest.
Carlyle declined to comment. Yes Bank did not respond.
SBI is the largest shareholder in Yes Bank with 30%, down from 48% in March 2020. There is a lock-in period of three years for SBI, which means it cannot lower its holding below 26% till March 2023. It has already ploughed in Rs 7,810 crore into the bank in two tranches. It is thought unlikely that SBI would dilute significantly at this stage.
Warrants can also be issued to incoming investors for future conversion as part of a structured deal linked to performance milestones.
LIC, HDFC Life Insurance and a clutch of private sector banks — Axis, ICICI, Bandhan and IDFC First — are the other large shareholders of Yes Bank. Advent, Blackstone and Brookfield were among a handful of PE investors that had explored buying into the bank before SBI came to its rescue.
Banking on Financials
Carlyle, among the most active investors in India of late, has been scouting for opportunities in the Indian banking sector and was in advanced discussions with Axis Bank for a Rs 5,000 crore capital infusion two years ago.
The buyout group has deep relationships with SBI, having backed the state lender’s life insurance and credit cards business in the past. But in comparison to its investments in non-banking financial companies (NBFCs), which generated handsome returns for the fund, it has had a mixed experience with deposit-taking institutions.
Carlyle’s successful bank investments were made during financial crises, often backstopped by government support. In India, it has deployed over $2 billion in financial services alone in companies such as Housing Development Finance Corp (HDFC), PNB Housing Finance, SBI Life Insurance and SBI Cards.
“Despite the negative news flow around its takeover attempts of PNBHF, Carlyle wants to double down in the space,” said an adviser with the fund, on condition of anonymity. Former HDFC Bank chief executive Aditya Puri is a senior adviser with the fund.
Yes Bank has been turning around chief executive Prashant Kumar, with growth in loans and margin expansion, helping it post Rs 266 crore of net profit for the December quarter, a 77% year-on-year jump. Its capital adequacy ratio, at 17.7%, is well above regulatory norms.
Officially, the bank has said its gross non-performing assets (NPA) are 14.7%, or Rs 28,508 crore, as on December 2021. But in addition to this, loans amounting to Rs 26,854 crore are being restructured or are likely to turn sour.
Such elevated NPA levels underpin the negative stance equity market investors still have on the bank. This is also reflected on its stock price, which is down 21% in the past year compared with the BSE Banking Index which fell 0.15% in the same one-year period.
“The absolute gross NPA has remained sticky, at Rs 28,000-29,000 since the third quarter of FY21, while the overall gross stress level is estimated at ~Rs 52,000 crore (22.6% of loans/investments),” said Raghav Garg, analyst with Nirmal Bang Institutional Equities. “Further, restructured loans increased by 11% quarter-on-quarter (QoQ) to ~Rs 6,900 crore, while the 31-60 days-past-due stock swelled by 46% QoQ to Rs 5,300 crore, which could flow into NPAs over the coming quarters, indicating that risks pertaining to fresh stress formation have not completely abated.”
