Yes Bank Ltd., the Mumbai-based private sector lender, could face a one-time results hit of ₹5,300 crore to ₹5,400 crore, following the Supreme Court’s decision to set aside the write-off of the Additional Tier-1 bonds worth ₹8,415 crore, CNBC-TV18 has learnt from two people with direct knowledge of the matter.
The bank is examining the implications of the judgment, including the accounting treatment required to reinstate the bonds and its obligations towards coupon payments. Sources indicate that the lender could recognise the adjustment in the September quarter itself, whose results are due tomorrow, or defer it to the third quarter of FY27, but no later than that.
The estimated ₹5,300 crore – ₹5,400 crore impact factors in the bank’s normal quarterly profit run rate of around ₹1,000 crore. The final accounting impact, however, will depend on the bank’s assessment of the judgment and the treatment ultimately adopted.
Yes Bank had reported a net profit of ₹1,071 crore in the June quarter, meaning the estimated impact will be around five times the first quarter profit.
Why Is Yes Bank Facing This Potential Earnings Hit?
The Supreme Court on Thursday upheld the Bombay High Court’s decision to set aside Yes Bank’s Rs 8,415 crore AT-1 bond write-off in March 2020. The court ruled that the bank’s Administrator did not have the authority to write down the bonds under the final reconstruction scheme.
The write-off took place during the RBI-led reconstruction of Yes Bank, when the lender was facing a severe financial crisis. The rescue involved capital support from State Bank of India and other lenders, while the AT-1 bonds were written down to zero.
Bondholders challenged the write-off, arguing that the final reconstruction scheme did not authorise the action. The Bombay High Court ruled in their favour in January 2023, and the Supreme Court has now upheld that decision.
The ruling effectively reopens the question of how the ₹8,415 crore liability should be treated in Yes Bank’s books.
How Does The ₹5,300 Crore – ₹5,400 Crore Impact Arise?
Sources indicate that reinstating the bonds will require an accounting correction, reversing the earlier write-off and restoring the amount to AT-1 capital, with the corresponding adjustment flowing through the profit and loss account.
The estimated net earnings impact of ₹5,300 crore to ₹5,400 crore factors in approximately ₹1,000 crore of profit that the bank would ordinarily generate in a quarter.
In simple terms, the potential hit is substantially larger than the bank’s normal quarterly earnings. The estimate is based on sources’ assessment and is not a final loss figure formally disclosed by Yes Bank.
Payment Of Coupons Add To The Uncertainty
Apart from reinstating the principal amount, the bank is examining its obligations towards coupon payments, or the periodic interest paid to AT-1 bondholders.
Paragraph 81 of the Supreme Court judgment states, “The payment of annual coupon rate shall remain unaffected by the outcome of these appeals and must be made in terms of the Information Memoranda.”
Sources said the bank’s legal team is assessing whether it has any discretion over these payments and what the judgment means for its interest-payment obligations.
The two bond issuances carried annual coupon rates of 9.5% and 9%, respectively. Based on their original principal amounts, a full resumption of these coupons would amount to approximately Rs 772 crore annually. However, the treatment of any retrospective payments and arrears remains to be determined.
Reinstatement Does Not Mean Immediate Cash Outflow
AT-1 bonds are perpetual debt instruments, meaning they do not have a fixed maturity date. They are designed to absorb losses when a bank faces financial stress and can be written down or converted into equity under specified conditions.
The immediate issue for Yes Bank is therefore not necessarily an immediate repayment of the entire ₹8,415 crore principal. The key concerns are the accounting adjustment, its impact on reported earnings and the implications for regulatory capital.
A CRISIL assessment has estimated that full reinstatement could reduce Yes Bank’s Common Equity Tier-1 (CET1) ratio by around 2.3-2.5 percentage points, while increasing its AT-1 capital by a similar extent. This could leave overall regulatory capital adequacy broadly unchanged, even as the composition of capital changes.
S&P Global Ratings has also indicated that the ruling is not expected to affect Yes Bank’s credit ratings, although the accounting impact could weigh on earnings. Its assessment is that the bank’s capital position should remain adequate, with the impact on common equity largely offset by the reinstatement of AT-1 bonds.
What Next For Yes Bank?
Sources indicate that Yes Bank could account for the adjustment in the September or December quarter, depending on its assessment of the judgment and the appropriate accounting treatment.
The bank is also examining its legal options and the implications of the ruling for coupon payments. The final timing and quantum of the accounting impact have not yet been formally confirmed.
CNBC-TV18 has reached out to Yes Bank for comment. The bank’s response is awaited.
Shares of Yes Bank are trading 2.3% lower on Friday at ₹17.71. This follows the 15% drop seen by the stock on Thursday after the Supreme Court decision, which marked the biggest single-day fall for the stock in six years and wiped out ₹10,000 crore of its market capitalization.