Yes Bank, Indiabulls Housing are different peas stuck in same pod

A year ago, before the liquidity crunch manifested for non-banking financial companies (NBFCs), Yes Bank Ltd’s market capitalization was 1.5 times that of Indiabulls Housing Finance Ltd. Today, that difference has narrowed quite a bit as the adjoining chart shows.

Both the lenders have seen a massive erosion in their market value, but Yes Bank’s pain has been deeper.

Are investors looking at a bank and an NBFC through the same lens?

Is this similarity of treatment justified? After all, depositors and regulators treat non-banks differently from banks and rightly so.

The heart of the matter is that both lenders have seen their luck run out in terms of capital. Capital is key for future growth and investors bet on the future potential rather than current circumstances.

Clearly, when it comes to trust, markets spare none. “There are differences between banks and NBFCs when it comes to factors such as protection of deposits and access to liquidity windows. But when you are dealing with a deficit in terms of counterparty confidence, the difference in name tag doesn’t make much of a difference. It’s only when the tide goes out that we know who can still borrow a piece of clothing," said an analyst at a foreign brokerage firm, requesting anonymity.

The sharp drop in market capitalization of the two lenders suggests investors are assigning a low probability of either of them getting capital easily.

Being a bank meant that Yes Bank needn’t worry about a steady stream of funding. But the lender hasn’t been able to beef up its equity capital, essential for growth in the coming years. The bank’s new chief Ravneet Gill has given repeated assurances that money would come, but the wait for a sizeable infusion continues.

In the meanwhile, its erstwhile promoter Rana Kapoor has sold off most of his stake despite a massive erosion in value. This raised many eyebrows, especially since Kapoor had staunchly defended his Yes Bank stake in the past, comparing it to diamonds.

For Indiabulls Housing Finance, the merger with Lakshmi Vilas Bank Ltd was key to steadying its funding boat. Indeed, the company had set in motion structural changes, in a serious pursuit of the regulator’s approval for the merger. Analysts at Macquarie Capital Securities (India) Pvt. Ltd noted that it was telling the regulator refused despite all efforts from the lender. “What is the future of IHFL? We are very unsure now. Since most market participants are reluctant to give money, this rejection (of the merger by RBI) further jeopardises the funding situation," the brokerage firm said in a note.

In the last one year, Indiabulls Housing Finance had to sell down its loans to conserve capital. It had to defend itself from the onslaught of a liquidity crunch.

It’s interesting to note that until this negative development (the merger getting called off) for Indiabulls Housing, its market cap was higher than that of Yes Bank for most of the past three months.