YES delivered strong bottomline in spite of large provisioning. Asset quality metrics deteriorated sharply even excluding the known one-off cement exposure. Clawing back the one-off provision, comfort around asset quality along with steady improvement in retail asset and liability remains key to further re-rating of the stock. Maintain Hold with revised PT of Rs 1,605.
Asset quality worsens
The total stressed assets increased 107 bps sequentially to 2.3% of net advances. The slippages in Q4 were Rs 19 bn including a cement exposure of Rs 9 bn where provisions may be reversed.
Strong profit growth driven by NII and non-interest income
The net profit for the quarter grew 30% y-o-y. Core PPOP grew 31.5% y-o-y, driven by strong Core fee. Total provisions were 38% higher than estimates at Rs 3.1 bn. The credit cost for Q4FY17 was 70 bps, above the guided range of 50-60 bps for FY17. NIM expanded sequentially to 3.60%.
CASA improves, corporate drives loan growth
Strong growth in CASA continued with CASA ratio reaching 36.3%. The bank delivered strong loan growth across both corporate and retail & business banking. CASA and retail term deposits now make up 61.5% of total deposits vs 59.2% q-o-q.
Capital consumption is abnormally high
Post qualified institutional placement (QIP), CET1 ratio improved to 11.4% from 9.9% at Q3FY17. The bank also announced a dividend of Rs 12/shr. Adjusting for the QIP, Q3 CET1 ratio would have been 13.0%. This meant the bank consumed 160 bps of CET1 capital in Q4 on RWA growth and dividend pay-out.
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Change in estimates
Our revenue estimates for FY18-20e goes up ~9%, driven by better loan growth, margins and strong non-interest income. However, higher than earlier estimated operating expenses and credit cost offset the upward revision in revenue and lead to largely unchanged net earnings.
We value YES at 3x trailing adj BV (March 18E) and 14.9x EPS (12m to March 19e). Stock trades at 3.5x trailing adj. BV (March 17) and 19.3x EPS (12m to March 18e) — 5yr/10 year average of 3.02x/3.40x and 11.4x/12.9x. Downside risk: Higher NPL, NIM compression and slowdown in retail franchise build out. Upside risk: Improvement in cost and NPL ratios.
Asset quality deteriorates materially, slippages ratio spike
The total stressed assets spiked to 227 bps in Q4FY17, increasing 107 bps sequentially. The bank explained that 69 bps of increase was due to the classification of a large Rs 9.11 bn exposure to a cement company into NPA. The management is confident of this returning into standard asset once the M&A process involving this business is completed.
Gross NPA ratio jumped 67 bps sequentially to 1.52% and net NPA ratio increased by 52 bps to 0.81%. Restructured loans improved to 36 bps vs 43 bps of loans sequentially. Provision coverage ratio dropped massively from 66% to 46.9%. Security Receipts also jumped materially to 74 bps from 22 bps sequentially. The slippage ratio jumped to above 7.8%; that is an all-time high in the bank’s history.