Downgrade Yes Bank Ltd shares to 'underweight': JPMorgan

Apr 16 2014, 20:02 IST
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SummaryYes Bank is fighting an adverse macro on multiple fronts ó yields have been rising since April and there are no recovery signs of growth.

Rana Kapoor's Yes Bank is fighting an adverse macro on multiple fronts ó yields have been rising since April and there are no recovery signs of growth.

The recent rally has partially taken the valuation argument out and the cheap absolute valuations arenít that attractive in the context of slowing earnings. We cut estimates by about 5% and downgrade to the stock to Ďunderweightí. Interest rates remain elevated and volatile. Both short- and long-term rates are up since the April 1 credit policy announcement. Moreover, all concurrent indicators continue to point to a weak macro. For Yes Bank Ltd , the ability to pass on higher rates to borrowers could be inhibited by the weak macro, placing growth at risk.

We think credit costs for Yes should remain elevated through FY15, in line with our macro and sector views. The economy remains weak, and Yesís SME/mid-corporate book remains vulnerable to the prevailing high interest-rate environment.

We think ROAs have peaked and the higher credit costs could see a temporary decline in FY15 ó with loan growth also slowing, EPS could stay muted for a while.

Yes faces multiple growth challenges. The weaker macro is bad for its high-yield wholesale book and throws up fewer credit-safe opportunities. Its retail loan business is yet to reach critical size in reach or volumes and the retail deposit base is still not strong enough to drive high growth in low-yield segments.

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