RoA target of 1% by FY25 key monitorable for Yes Bank: Analysts

Yes Bank’s management has guided for a credit cost of 0.25-0.3% for FY23, down from 0.55% in FY22.

RoA target of 1% by FY25 key monitorable for Yes Bank: Analysts
The bank now resembles any other private bank, analysts at Kotak Institutional Equities (KIE) said, and that means a lack of differentiation.

A strong growth in advances and better cost efficiencies will help Yes Bank achieve its targets on return on assets (RoA), a key area of focus after its $1.1-billion fund-raising exercise, analysts said.

The private lender has guided for an RoA of 0.75% by end-FY23 and 1-1.5% by FY25. For the quarter ended June 2022, Yes Bank’s RoA stood at 0.4%.

In order to achieve its RoA targets, Yes Bank will need to scale up advances growth to the mid-teens and improve cost efficiencies, analysts at ICICI Securities said in a report on Monday. It will also have to do better on its net interest margin (NIM) trajectory and sustain credit costs at low levels.

“The proposed equity raise will provide confidence as well as growth capital to scale up RoA to targeted levels. We see a turnaround in relevant operating metrics and improved confidence in the stability of the franchise,” ICICI Securities said. At the same time, the broking firm intends to keep an eye on risks arising from delays in resolution of stress pool, a modest return on equity profile during the transition and supply overhang after expiry of lock-in shares in March 2023.

In Q1FY23, Yes Bank’s advances grew 14% year-on-year to Rs 1.86 trillion. Its cost-to-income ratio rose to 77.6% in the period from 71.3% in the preceding quarter. The NIM shrunk 10 bps sequentially to 2.4%.

The lender has set itself a target of  a 15% advances growth for the current year, led by retail and small enterprises growth of 25% and corporate growth of 10%. It expects to end the year with a NIM of 2.9%.

In a post-results call with investors, MD & CEO Prashant Kumar said since Yes Bank is now focusing on growth, its cost-to-income ratio will remain around 70-71% in FY23. “…since we have started on the growth phase and since there is a higher focus on retail and MSME (micro, small and medium enterprises), I think at this point of time, it is important to help those kinds of investments which would start giving you revenues over a period of time,” Kumar said, adding, “Similarly, I think not only for us, (but) for any bank, it is important to keep on investing in the IT infrastructure.” As revenues increase, the ratio will eventually fall, he said.

While offloading a Rs 48,000-crore bad loan pile and capital-raising will help release management bandwidth to pursue growth, a relatively weaker record on profitability may put the lender at a disadvantage vis-à-vis its competitors, sector experts said.

The bank now resembles any other private bank, analysts at Kotak Institutional Equities (KIE) said, and that means a lack of differentiation.

“Each bank is coming out of their respective asset quality challenges, either caused by Covid or their own underwriting challenges. Nearly all these banks are stepping up their growth engines and looking at faster normalisation of long-term return ratios. Yes Bank is also in a similar situation with the only exception (being) no strong profit pools readily available,” KIE said in a note on Monday.

Yes Bank’s management has guided for a credit cost of 0.25-0.3% for FY23, down from 0.55% in FY22.

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