SC ruling deals a heavy blow to Yes Bank's capital

Yes Bank Share Price After Q1 Business Update — The impact could pull Yes Bank's CET1 ratio down to around 11-11.5%, from 14% at the end of June, placing it at the lower end of core capital ratios among major Indian banks.

Mumbai: Yes Bank, in which Sumitomo Mitsui Banking Corp (SMBC) has a controlling stake, faces a hit to its loss-absorbing capital buffer-or, Common Equity Tier-1 (CET1)-as Thursday's Supreme Court verdict reversing the write-down of more than $800 million of additional Tier-1, or AT-1, bonds punches a hole in its core cash pile.

The court verdict in favour of AT1 bondholders, who collectively contributed ₹8,415-crore to the high-risk quasi-equity instruments, is expected to dent the lender's equity capital by 230-300 basis points, rating agencies and analysts said.

One basis point is a hundredth of a percentage point.

AT1 bonds were under the lens after the administered takeover of Credit Suisse by UBS Group three years ago involved the writedown of nearly $17 billion of such instruments, triggering lawsuits in multiple geographies.

Also Read | Yes Bank shares nosedive 20% after SC declares Rs 8,415 crore AT-1 bond write-off illegal

Crisil Ratings had estimated that a complete write-back of AT-1 bonds could reduce Yes Bank's CET1 by about 230-250 basis points, while Icra estimated an impact of around 255 basis points. CareEdge Ratings had pegged the potential reduction at 250-300 basis points.

SC Ruling Deals a Heavy Blow to Yes Bank’s Risk Equity Capital

The impact could pull Yes Bank's CET1 ratio down to around 11-11.5%, from 14% at the end of June, placing it at the lower end of core capital ratios among major Indian banks. The Reserve Bank of India (RBI) requires banks to maintain a minimum CET1 ratio of 5.5% of risk-weighted assets, apart from a 2.5% capital conservation buffer.

In an exchange filing Yes Bank said it is in the process of examining the final order copy of the judgment, and its implications.

CET1 is a bank's highest-quality capital, consisting primarily of equity and retained earnings, and acts as the first buffer against unexpected losses. A sharp reduction in CET1 can therefore limit the amount of balance-sheet growth a bank can support without raising additional equity.

People familiar with Yes Bank's capital planning said the lender had built buffers factoring in an adverse outcome in the AT1 litigation, including a worst-case scenario. The eventual impact, however, will depend on the way the judgment is implemented and the accounting treatment adopted.

The apex court on Thursday dismissed appeals filed by Yes Bank, the Reserve Bank of India and the government against the Bombay High Court judgment that had set aside the March 2020 write-down. The two affected AT1 issuances comprised ₹3,000 crore of bonds issued in December 2016 carrying a 9.5% coupon and another ₹5,415 crore issued in October 2017 carrying a 9% coupon.

Importantly, the judgment does not direct an immediate cash repayment of ₹8,415 crore, nor does it quantify any liability for accumulated past coupons. The court separately said annual coupon payments would remain unaffected by the outcome of the appeals and must be made in accordance with the bonds' information kit.

This leaves the eventual financial impact dependent on whether the bonds are reinstated, settled in cash or dealt with through another mechanism, as well as the accounting treatment adopted.

Following the verdict analysts estimated that Yes Bank's net worth could decline 16.5% under a principal-only scenario. A more severe scenario incorporating principal and accrued coupons estimated the potential liability at around ₹13,770 crore, resulting in a larger hit to capital.