The current market value of Yes Bank is Rs 68,586.98 crore. A 51% stake sale would make it India’s largest banking sector M&A.
Yes Bank is in search of a new owner four years after a central bank-orchestrated rescue and its subsequent turnaround. Earlier this year, MUFG was one of several potential candidates tapped to evaluate the Yes Bank transaction, but dropped out after a brief engagement. Following the collapse of the HDB talks, MUFG is said to have rekindled its interest in Yes Bank.
The Japanese lender has already submitted a non-binding offer to buy out State Bank of India’s 23.99% stake in the bank, a move that will trigger an open offer for an additional 26% stake. In the last few days, MUFG has also initiated detailed due diligence of Yes Bank and has a four-six-week window to complete the process. No exclusivity agreement has been signed by any party, according to the people cited above.Other domestic banks and financial institutions such as HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank and Life Insurance Corp of India together own 11.34%. The current negotiations are taking place only with SBI, the single largest shareholder, and Yes Bank’s management, said the people.
It’s not clear if the others will exit along with SBI, since they don’t have any tag or drag rights that will compel them to sell. But with the turnaround in place, they too may divest, either partially or entirely, said the people cited above. Private equity funds Advent International and Carlyle owned stakes of 6.84% and 9.20%, respectively, as of June. Carlyle has been periodically selling in the market over some time now. The stance of the PE firms too is unclear.
MUFG will only proceed and make a binding offer if it’s assured of a majority stake or ownership of the bank, said the people cited above. It’s working with legal and regulatory advisors to work out the exact deal structure.
MUFG declined to comment. SBI and Yes Bank did not respond to emails till press time Thursday.
There’s no certainty that the talks will lead to an agreement in the coming days, said the people cited above.
Considering the scarcity of private sector bank ownership opportunities in India, SBI has been seeking a control premium. The Yes Bank stock however has been lacklustre, down 1.9% in the year to date. It closed Thursday at Rs 21.86, down 2.5% following a weak business update for the September quarter. The bank reported stronger growth in both deposits and advances year-on-year but noted a sequential decline in liquidity coverage ratio (LCR), which dampened investor sentiment.
The other two suitors in fray, Emirates NBD and Sumitomo, have been negotiating with Yes Bank and SBI as well as the Reserve Bank of India (RBI) to relax the 26% cap on voting rights for overseas stakeholders. ET was the first to report on August 8 that a third suitor, Mizuho, was exiting the process.
Foreign direct investor (FDI) rules permit aggregate foreign participation in Indian private banks up to 74%, with the holding of each entity capped at 15%. The rules also don’t permit a single foreign bank to take a controlling stake in an Indian bank.
However, the RBI has been flexible about ownership guidelines for Yes Bank, allowing the purchase of a controlling stake of 51% and above by a single buyer, to be lowered over time to 26%. Alternatively, the RBI has been willing to consider the wholly owned subsidiary (WOS) route to give Yes Bank’s suitors a controlling economic interest. MUFG though is not keen on such a structure but is comfortable with the 26% voting rights cap, said one of the persons cited.
“Even though SMBC’s top brass from Japan visited India to discuss the terms for the Yes Bank acquisition and met with the regulators, they along with Emirates NBD have been bargaining hard on price, veto rights or relaxation of the 26% voting rights cap,” the person said. “However, RBI has made it clear such one-off exemption cannot be given as it would need legislative amendments.”
The RBI did make exceptions in the case of Prem Watsa’s Fairfax acquiring a 51% stake in ailing Catholic Syrian Bank in 2018, or DBS taking over Laxmi Vilas Bank but the equity value of the targets was near-zero in those instances. Yes Bank, on the other hand, is a much larger organisation, has turned itself around and has institutional and retail shareholders, thereby making any relaxation of voting or veto rights that much tougher.
Earlier this week, Yes Bank highlighted an 18.3 percent YoY increase in total deposits for the September quarter, reaching Rs 2,77,173 crore. However, this was a slight moderation compared to the 20.9 percent YoY growth in deposits that the bank reported in the June quarter. Sequentially, deposits grew by 4.6 percent from the June quarter, showing a steady but slower pace of growth. CASA growth picked up to 8.6%, after a decline of 1% compared to the last quarter. Even term deposit growth saw a slight pick up of 2.8% as against a decline of 0.3% Q-O-Q in the prior quarter. Its net interest margin (NIM) remains the lowest among the top 10 private banks. It has also been a consistent laggard in priority sector lending (PSL). The Reserve Bank of India guidelines require banks to allocate at least 40 percent of advances to priority sectors, such as agriculture, small businesses, education and low-cost housing.
