India bank capital fail is more farce than tragedy

State Bank Of India

Today 13:00

The author is a Reuters Breakingviews columnist.  The opinions expressed are her own.
By Ujjaini  Dutta
BENGALURU, Oct 22 (Reuters Breakingviews) - Yes Bank YESB.NS is being forced to revisit an existential crisis. Last week India's Supreme Court upheld a ruling ordering the $5.6 billion lender to restore 84 billion rupees ($884 million) of additional Tier 1 capital bonds written off as part of its 2020 collapse. The Reserve Bank of India and the government joined the bank in unsuccessfully appealing the decision. The ruling caps what has been a comedy of errors. The irony is that the lender's turnaround has made it strong enough to take this latest, painful hit in its stride.
The rescue itself was necessary and successful. The lender was pushed into administration in March 2020 after bad loans piled up. Authorities stitched together a $1.4 billion bailout led by State Bank of India SBI.NS with help from HDFC Bank HDBK.NS, ICICI Bank ICBK.NS and five others. The lender returned to profitability two years later and until last week's ruling boasted a common equity Tier 1 capital ratio higher than its state-backed rescuer. Yes Bank also bagged a new deep-pocketed shareholder: Japan's Sumitomo Mitsui Financial Group 8316.T picked up a 25% stake last year.
The AT1 bonds case has come back to haunt the bank, though, because of a series of curious flubs at the time. First, the draft turnaround plan explicitly provided for writing them down, but the key bond clause was missing in the final version. Second, India's regulatory framework mandates that AT1 capital be written down before the restructuring process takes effect, not as part of it. And the bank's administrator lacked the authority to wipe them out anyway.
Yes Bank's strong comeback at least means reviving the bonds won't kill it. Sure, accounting for the reappearance of the AT1 bonds means its near-11 billion rupee profit in the three months to the end of September would dive to a 52 billion rupee loss. It would also lop 2.3 percentage points off its Common Equity Tier 1 ratio, reducing it to 11.4%, lower than many of its rivals. The prospect of paying the up to 9.5% coupon on the bonds - possibly including accrued interest since 2020 - would sting even more.
But the bank is in good enough shape to weather this new storm. Boss Vinay Muralidhar Tonse says that there's no immediate rush to raise capital. And while shareholders wiped some 20%, or $1.4 billion, off the bank's stock market value in the three trading sessions after the ruling, the dip suggests they're concerned only about lost earnings, not a return to a full-blown crisis. That's not the victory the bank was hoping for, but it could have been far worse.
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CONTEXT NEWS
India's Supreme Court on October 15 set aside Yes Bank's write-off of 84 billion rupees in additional Tier 1 bonds under a restructuring scheme six years ago.
The Sumitomo Mitsui Banking Corporation-backed lender’s ⁠AT1 bondholders had challenged the write-off, and the Bombay High Court ruled in their favour in 2023. Yes Bank, the Reserve Bank of India and the federal government appealed that ruling, but the Supreme Court upheld the lower court's decision.
The Supreme Court said the bank's administrator did not have the power to write down the bonds after the restructuring scheme was finalised, and ruled that the write-off was "impermissible".
The lender on October 17 reported a 65% jump in net profit to 10.80 billion Indian rupees for the September quarter, but said the figure does not reflect the impact of court ruling. Had the impact been recognised, the bank would have posted a quarterly loss of 52.17 billion rupees, it said in a filing.

(Editing by Antony Currie; Production by Aditya Srivastav)
((For previous columns by the author, Reuters customers can click on DUTTA/ujjaini.dutta@thomsonreuters.com))