Taxpayers are the biggest casualty in the government-approved bailout plan of YES Bank by a State Bank of India (SBI)-led consortium, says the latest report by global research and brokerage firm Macquarie. Any bail out of a private sector entity by public sector undertakings (PSUs) / Government / taxpayers indeed creates a moral hazard, the brokerage firm said.

“The fact that government is considering such a bail out proposal clearly shows the risk inherent in investing in PSU banks/companies who continue to be subjected to the vagaries and compulsions of the government. The bigger casualty is taxpayers as their money is being used to infuse capital in PSU banks time and again. In other words, it is the taxpayers who are bailing out YES Bank indirectly in our view,” wrote analysts at Macquarie in a co-authored report led by Suresh Ganapathy, their associate director.

Over the past few months, YES Bank has struggled to raise capital – nearly $2 billion – it desperately needs to stay above regulatory requirements. The bank is battling bad loans due to its exposure to troubled sectors. On February 12, YES Bank had delayed announcement of its December quarter results as it was in talks with potential investors, including J C Flowers, for raising equity capital. It received non-binding expressions of interest from several investors, including J C Flowers and Tilden Park Capital Management.

Analysts at JP Morgan, too, share a similar view and say the quasi sovereign bailout (by SBI/LIC) is in fact bond holder / depositor – led bailout and not an equity one. While cutting the target price of YES Bank to Rs 1, JP Morgan says the forced bailout investors will likely want the bank to be acquired at near zero value to account for risks associated with the stress book and likely loss of deposits.

“In sum, we think the bank will need to be recapitalised at nominal equity value and could test dilution of AT1s. We remain underweight and cut our target price to Rs 1 as we believe net worth is largely impaired,” wrote Saurabh Kumar, Harsh Wardhan Modi and Rahul Jain of JP Morgan in a report.

SBI and LIC are set to pick up 49 per cent stake in YES Bank by acquiring preferential shares in the private lender at Rs 2 per share. The deal size is estimated at 490 crore. As regards regulations, SBI will likely be given exemption from making an open offer.

“One buys a bank for its liabilities franchise and not for its assets. We are unsure of YES Bank’s quality of liabilities franchise, which perhaps could have further got affected due to the current solvency issues. Consolidation would have brought about a lot of integration challenges as well as legal challenges as we believe SBI Act needs to be amended for SBI to acquire a private sector bank. Even in this case, the deal will require blessings of the regulator as well as the Government,” the Macquarie report argues.