Contagion Risk on India Seen From Modi’s Move to Seize Yes Bank

(Bloomberg) -- India's move to take control of beleaguered lender Yes Bank Ltd. could lead to a plunge in the riskier assets of Asia's third-largest economy, according to analysts.

The rescue illustrates the widening damage from India's shadow banking crisis, which has left the lender with a growing pile of bad loans. India benchmark Sensex Index dropped as much as 3.8% on Friday, set for its biggest fall since August 2015 while the rupee and the government bond yields also slumped. Shares in Yes Bank and State Bank of India Ltd. fell more than 10% each.

Here is what market watchers are saying:

Citigroup (analysts including Manish Shukla)

• “While RBI works on a rescue/revival package for Yes Bank, there could be uncertainty on liability inflows (deposits as well as bonds) for small/mid-sized banks as well as NBFCs.”
• “Fast clarity on the plan of reconstruction/amalgamation is critical from a system perspective.”

Zephyr Financial (founder Arjun Parthasarathy)

• Yes Bank's seizure by the government is coming “at a time when India's slowing economy is faced with issues of coronavirus.”
• “The effect of Yes Bank's collapse will be felt across all markets with Sensex, Nifty falling sharply, rupee weakening and credit markets becoming more frozen and illiquid. There could be a flight to safety to government bonds.”

Equinomics (head of investment advisory Chokkalingam G)

• “Yes Bank's shares are likely to crash today. It being put on moratorium signals more worries around its asset quality.”
• “SBI shareholders may not lose much because I don't think SBI alone will take the burden. The takeover offer can at best happen only at the face value of Yes Bank.”
• “GTB was the similar case in 2000s. GTB was acquired at almost nil value by OBC. Shareholders of GTB got nothing at that time.”
• “There will be new infusion of capital needed to avoid asset-liability mismatch.”

JM Financial (analysts including Sameer Bhise)

• “While asset side problems of Yes Bank were largely anticipated we believe this development takes markets by shock.”
• “With asset base of INR 3.47 trn, Yes Bank is a sizeable player in the banking system and a freeze on entity of such size could disrupt smooth function of the financial markets without strong regulatory intervention.”
• Could see a flight to safety of deposits from smaller/mid-size banks to larger and more stable banks.

Nirmal Bang (analyst Raghav Garg)

• “The contours of the restructuring/amalgamation scheme remain largely unknown at the current juncture.”
• “The development is negative for the stock given that the new capital is likely to come at a steep discount.”

To contact the reporter on this story: Abhishek Vishnoi in Singapore at avishnoi4@bloomberg.net

To contact the editor responsible for this story: Lianting Tu at ltu4@bloomberg.net

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