Yes Bank’s Share Price: Tumbling.
Created on 03 Sep 2019
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Updated on 15 Oct 2020
Aren’t stock markets known to be a risky investment? As the saying goes, ‘more risk, more returns’, but is it really true? The ups and downs of the share price can be a reason for happiness and trouble, both. With the overall economic slowdown, the downgrade of most share prices has knocked down the profits for most investors.
Have you been wondering how and why there is a slump in the share price of most private banks? One bank has certainly caught the attention of most investors. A few years ago, YES Bank was growing phenomenally. But the recent retardation has shown a downtrend in the growth of the company. Recently, India Ratings and Research have downgraded the long-term issuer rating to 'IND A+' for Yes Bank.
Let’s look at the share price change of YES Bank over the past year:
How was YES Bank on an uptrend a year ago?
To understand this, it is very important to know how a bank makes a profit. Suppose a customer deposits Rs. 100 to the bank and the bank lends it to some other customer at an interest rate of say, 12%. Now, the bank will need to pay interest on savings accounts, for instance, 4%. The remaining share is 8%(12-4).
The bank roughly incurs expenses of about 3-4%, therefore the earning of the bank after deducting all sorts of expenses is approximately 4%. Again, if any of the customers fail to pay back the loans, then the profit will keep reducing. This failure of repayment of loan is the Non-Performing Asset for the bank.
The specialty of YES Bank is that it caters to corporate groups. Thus, it gets bulk deposits and lends bulk loans as well. Their number of customers is definitely less than retail banks and thereby, the costs also reduce. Thus, YES Bank was able to have a sharp increase in its profitability because of the groups they targeted.
Why is there a fall in the Share Price?
Not everything is rosy for any industry or any niche. The initial years saw a major uptick for YES Bank as the economy was doing well. The economy was on an uptrend which ensured that the corporates are having a good time with their business. However, if we go by the above example, YES Bank has fewer customers and thus, if even one out of ten corporates fails to pay back the loan, then the bank will suffer a major downfall because of the huge amount of money at stake. This is exactly what happened with YES Bank in recent times.
In the past 18 months, the NPA for the bank has been increasing. One of the reasons behind that is a slowed economy. In the last couple of years, a number of companies have defaulted and that has created a big setback for private banks.
Trouble also began when the Reserve Bank of India (RBI) asked the co-founder, Mr. Rana Kapoor, to step down. Ravneet Gill, the former India head of Deutsche Bank, took charge as the first Chief Executive Officer from outside the founding family on March 2019. Before this decision, Yes Bank’s shares were thriving at close to Rs 400 per share.
What lies ahead for Yes Bank.?
YES Bank faced few entities which were defaulting and were facing illiquidity. If those issues could find a resolution, then the books of the bank would reflect positive changes. As of August 2019, there are three entities that made up for nearly 80 percent of the sub-investment grade book. Two of this accounting for Rs. 9000 crore is expected to get resolved this quarter.
Thereby, reducing the sub-investment grade book which currently stands at Rs. 29,000 crores. When this happens, the risk perception around the bank will get a little moderated. An investor would bet their money on any company only if they get the assurance from the lender that their strategy is paying off. The bank is looking at providing appropriate provision, efforts to clean the bad loans and improving deposits to augment the growth of the bank.
To know more about Yes Bank, Click Here.
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