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YES Bank, India's fifth largest bank by assets, redeemed its capital markets reputation on Friday when it completed an upsized $750 million Qualified Institutional Placement (QIP).
The 4,906 crore transaction just pipped Reliance Communications to the post as the largest-ever private sector QIP from India in rupee terms. The Anil Ambani-led group had previously completed a 4,800 crore deal in June 2014, while Axis Bank, India’s largest private sector bank by assets, is now third in the rankings with a 4,726 crore deal from January 2013.
YES Bank’s management are likely to feel particularly satisfied with the new deal, given the messy execution of their last attempted foray to market in September 2016.
That earlier $1 billion deal was cancelled mid execution after being beset by long list of woes, including: an overambitious issue size at a time when analysts were starting to question the sustainability of YES Bank’s valuation; unrealistic pricing ambitions above the stock’s spot close and; an unwieldy 11-strong syndicate, whose junior members complained about a lack of communication from the top.
This time round, the bank did not go out with all guns blazing, but opted for a smaller $650 million base size and a $100 million upsize option.
The underlying market backdrop was stronger than last September, although last week was marked by a small sell-off, which encompassed the banking sector, with Axis Bank falling 5% and ICICI Bank 6%.
However, bankers felt this was largely profit taking and investor sentiment remained strong following the resounding victory of prime minister Narendra Modi’s Bharatiya Janata Party in Uttar Pradesh two weeks ago. The BJP took control of India’s most populous state mid-way through his term with its largest-ever majority since 1980.
The election fallout has had a strong influence on foreign investors who have been buyers of the Indian market over the past three weeks, with net portfolio inflows of $3.536 billion according to Kotak Mahindra figures. By contrast, domestic institutions have been net sellers to the tune of $1.296 billion over the same period.
Allocations
YES Bank’s 33.72 million primary share deal (including upsize option) was pitched at a 1.2% to 4.2% discount to the stock’s Rs1,518.16 close on Thursday and priced at the tight end of the range at Rs1,500.
Specialists said a shadow order book had already been built prior to the deal’s launch and they were confident of hitting the full amount from the outset. After launching the deal at 9pm Hong Kong time on Thursday, it was fully covered (including the upsize amount) one hour later and went on to close 2.5 times covered the following morning at 10.3am.
A total of 60 lines were allocated stock, with the top 10 receiving 75% of the deal, backed by two very large anchor orders. By type, long-only funds were allocated 80%.
“YES Bank management had a very clear idea where they wanted this deal placed and were very involved in the allocation process,” said one observer. “That’s why there was such a strong allocation to long-only funds.”
Sustainable loan growth?
The transaction represented 7.96% of YES Bank’s pre-issued capital and analysts said it would boost the bank’s Tier 1 capital ratio by about 30bp to roughly 12.5%.
It should enable the bank to sustain its fast loan growth. During the third quarter, this rose 39% year-on-year, outpacing peers and helping to push YES Bank’s stock price up very strongly so far this year.
Year to date, YES Bank is up 32.22% compared to a 10.5% rise in the Sensex Index and an 18.09% increase for perennial sector favourite, HDFC Bank.
The majority of domestic houses, which cover the stock, still have a buy recommendation on the grounds of consistent earnings delivery minus asset quality bumps.
The bank is transitioning from its former wholesale model to greater retail lending and has doubled its branch network over the past three years.
Analysts say it is currently valued at roughly 3.5 times price to 2018 book, towards the higher end of the pack for retail banks, which range from 2.4 times (City Union Bank) to 4.9 times (HDFC Bank).
There is currently a very big valuation gap between retail banks and wholesale/public sector banks, which are trading in a 0.7 times to 2.2 times 2018 book range.
In a recent research report, Kotak Mahinda, queried whether this valuation gap is sustainable. It says that in the absence of strong corporate credit growth, wholesale banks are likely to start pushing for greater market share in the retail sector, undermining the net interest margins and profitability, which are currently underpin valuations there.
UBS has also long held a more bearish view on YES Bank, arguing that its non-performing loan coverage ratio is unsustainably low – net NPLs at 0.3% at the end of 2016. It says the bank has been slow in recognising stress compared to its peers despite the fact that it has larger exposure to leveraged corporates.
Management, nevertheless, remains confident that 25%-plus loan growth can be maintained and also says its CASA ratio should hit 40% ahead of its target at the end of the 2020 financial year. In December it stood at 33.3%.
Joint global co-ordinators for YES Bank’s new deal comprised Citic CLSA (lead left), Bank of America Merrill Lynch, IIFL Holdings and Motilal Oswal Investment Advisors.
