How to safely invest in stocks: The Yes Bank Example

The Yes Bank crisis created panic in March 2020 despite being the biggest private-sector bank. In fact, it was ranked as the number 1 bank in the Business Today-KPMG Best Banks Annual Survey 2008.

How did a top-performing bank like Yes Bank go into such a big crisis?

The share price of Yes Bank fell from ₹400 in 2018 to a meager ₹16.60 in March 2020. To date, the bank is drowning in liabilities. As investors, we are all aware of market fluctuations, but when we face a loss like this, chances are, we get scared of making further investments.

We’re here to tell you otherwise. Yes, investing in stocks is risky, but it is also a great way to build wealth over long periods of time. In this blog, we’ll share how you can invest safely in stocks, using the Yes Bank Crisis as an example.

If you want to avoid facing huge losses like in the Yes Bank crisis, it is crucial to research about the company before you invest in it.

Understanding the stock market is essential, but it can often feel overwhelming and confusing. So we’re making it easier for you.

Buying a stock means buying a small part of the company. Each stock represents your ownership in a company. The Stock Market is the market where these stocks are bought and sold.

Investing in the stock market can be a rewarding way to grow your wealth and achieve your financial goals. However, investing also involves risks and uncertainties that can lead to losses if you are not careful. It is crucial to research a company before investing in it, especially if you are planning to invest in stocks of private sector banks.

Investing in stocks of private sector banks can be profit-making, given their potential for growth and profitability.

Private sector banks in India have been growing at a faster pace than their public sector counterparts, thanks to their focus on technology, innovation, and customer-centricity. However, investing in bank stocks can also be risky, as banks are highly regulated and vulnerable to changes in the economy and interest rates.

What are Private Sector Banks?

Private sector banks are banks that are owned and operated by private entities. Private entities include individuals, corporations, or trusts. They are not controlled by the government and are subject to market forces and competition. Private sector banks offer various banking and financial services to customers, such as deposits, loans, credit cards, insurance, mutual funds, etc.

However, private sector banks also face challenges and risks that can affect their performance and profitability. For example, they may have to deal with bad loans, regulatory issues, governance problems, frauds, scams, competition, etc. These factors can impact their share prices and dividends and erode the value of your investment.

Researching a company can also help you avoid investing in companies that are facing financial distress or are involved in unethical or illegal activities.

Let us delve deeper into the Yes Bank Crisis

Yes Bank was founded in 2004 by Rana Kapoor, Ashok Kapur, and Harkirat Singh. It was one of the fastest-growing private sector banks in India and had over 1,000 branches across the country. Yes Bank offered various banking and financial services to customers, such as deposits, loans, credit cards, insurance, mutual funds, etc.

However, Yes Bank also engaged in high-risk lending practices and gave loans to companies that were already under financial stress or had poor credit ratings. Some of these companies included DHFL, IL&FS, Reliance Group, Zee Group, Essel Group, etc. These companies defaulted on their repayments and became non-performing assets (NPAs) for Yes Bank.

As a result of its high Non-Performing Assets (NPAs) and low capital adequacy ratio (CAR), Yes Bank faced a liquidity crunch. This led to a loss of confidence among its depositors and investors.

Its share price plummeted from over ₹ 400 in 2018 to less than ₹ 16 in 2020. Its ratings were downgraded by various rating agencies and it was put under moratorium by the Reserve Bank of India (RBI) in March 2020.

The RBI imposed a limit of ₹50,000 on withdrawals by depositors and superseded the board of directors of Yes Bank for 30 days. It also announced a reconstruction scheme for Yes Bank involving an infusion of ₹10,000 crores by a consortium of eight lenders led by the State Bank of India (SBI).

The reconstruction scheme was approved by the government and the RBI lifted the moratorium on Yes Bank on March 18, 2020. However, Yes Bank still faces challenges in restoring its credibility and profitability in the market.

Takeaways from Yes Bank Crisis

The case study of Yes Bank shows how important it is to research a company before investing in it. But how do you research a company? What are the sources of information, and what are the parameters to look at?

What are the benefits of research before investing?

Researching a company before investing in it can help you make more informed decisions about where to put your money. Here are some of the benefits of doing your homework:

You have clarity about the company’s financial health

When you read a company’s financial statements, you get the bigger picture of its revenue, net income, and other key financial metrics. This information helps you determine whether a company is profitable and financially stable.

Below are the key financials of Yes Bank documented from 2020 to 2022. Ideally, every investor should have done detailed research prior to opting Yes Bank. This step can be done even when there are clear signs in the market revealing the company’s liabilities. It will help cover for your losses.

You are aware of the company’s competitive advantages

When you learn about what sets a company apart from its competitors, it gives you a “competitive advantage” over other investors as well. You get a clearer understanding of how your company is better than its competitors to help it succeed in the long haul.

You understand the company’s management

When you research about a company’s management, it helps you determine whether they are capable and trustworthy. A good management team can help a company succeed, while a bad team can lead to failure.

Types of Research

When researching a company, there are two key areas to focus on:

Quantitative Research: This involves looking at the company’s business model, market position, and growth prospects. Learning about the company’s financials helps you understand the risks and potential rewards associated with the investment.

The below image shows data about Yes Bank’s bad loans for the years 2019 and 2020. It explains clearly how the bad loans doubled from 2019 to 2020. It also highlights how crucial it is to research the financials of the company.

Qualitative Research: This involves looking at the company’s management team, competitive advantages, and overall business model. This information can give you a better understanding of the company’s long-term prospects.

For example, let’s see what qualitative research on Yes Bank (prior to the crisis) would look like.

Below are two points from the analysis:

Strong marketing strategies: Yes Bank is seen to be strong on the marketing front, which means they are actively spending to aim for better reach in the public.

This can be observed from its Ad campaigns in mainstream newspapers, television, and print advertisements as its promotional activities. It is also active on social media platforms like Facebook, Instagram, Twitter, and YouTube to attract more clients.

Use of Digital in Rural Areas: The use of digital media for banking and financial purposes is not widespread in most rural regions. This means the bank has a possibility of losing out on a majority of the rural population.

How to Research?

There are several strategies you can use when researching a company:

Reference Websites or Trusted Sources

Look for reputable sources of information, such as financial news websites, investor blogs, or trusted investment advisors. These sources can provide you with valuable insights into a company’s financial health and prospects.

For example, two trusted sources for market and business news are Reuters & Bloomberg.

Narrow Your Focus

Focus on key financial metrics, such as revenue, net income, earnings per share, price-earnings ratio, and return on equity. This will give you a good idea of the company’s financial health and help you determine whether it’s a good investment.

VITTAE TIP: You can also google this vital information about any company. Every company by law has to be transparent about their bank statements. As a potential investor, you must look at the company’s finances and read up about its past financial statements as well.

The below image is a screenshot of the Google Search Result Page after you type “Yes Bank share price” and look in the ‘Financials’ section. You can see how there is clear information about the Income Statement for every month in 2022. This particular bar-graph shows the revenue and net-income of Yes Bank.

Tips & strategies when researching companies:

Look at Industry Peers: Look at how a company compares to its industry peers. This can give you a good idea of whether it’s outperforming or underperforming relative to its competitors.

Look at Historical Performance: Look at how a company has performed over the past several years. This can give you a good idea of whether it’s a stable and reliable investment

Look at Analyst Reports: Look at reports from investment analysts to get an idea of what they think about the company’s prospects. Keep in mind that analysts can be biased, so it’s important to do your own research as well.

In Conclusion

Investing in the stock market can be overwhelming and confusing, especially for beginners. That’s why it’s essential to have a trusted guide like Vittae, dedicated to helping individuals like you reach their financial goals.

Investors can customize financial plans that meet their specific needs and wants, ensuring that they stay on track to achieve their long-term goals. Our financial experts take the time to understand our client’s unique situations and provide personalized recommendations to help them make informed decisions.

We believe in empowering investors by educating them about what’s important and what’s not, making the investment process. You can confidently navigate the complexities of the stock market and take control of your financial future. 

Whether you are a beginner or an experienced investor, we can help you achieve financial growth by providing personalized financial planning and wealth management. You can navigate the complexities of the stock market with confidence and achieve your financial goals.