The RBI’s nil divergence report lifted Yes’ stock 50% from lows, but concerns persist around asset quality with sizeable exposure to Essel, DHFL, ILFS and ADAG. With a new CEO at the helm and senior management changes on the anvil, a sharper spotlight may reappear on its assets, CET-1 and growth outlook, which may skew NT risk-reward towards our downside case (Rs 206). Eventually, though, a transformative reset may bode well; maintain ‘hold’ and PT of Rs 265.
With stressed asset resolutions taking time, though, the initial stages of a sweeping reset may well be disruptive, especially if fee income erodes and in the context of its thin capital ratios. NT risk reward may be asymmetric, therefore, with our downside case suggesting Rs 206 at 1.5x P/B, where it has traded at when such concerns have spiked. And yet, a transformative reset may bode well for the medium term with investors favoring such strong actions like the change in attitude towards Axis and ICICI have shown. Yes may need to offer a credible follow-up plan, though, that encompasses (a) stress recognition & provisions, (b) a clear view on business priorities, (c) plans to augment alternate capabilities to offset income loss, and (d) a pragmatic view on capital raise.
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On balance, though, such sweeping changes may well be capped by its thin 9.1% CET-1, leaving limited headroom for an aggressive clean-up. Our base case currently factors a limited clean-up, therefore, leaving concerns on asset quality alive. Even so, we expect some resolution here over the next year through stress asset monetisations but also softer growth and lower returns with RoA/RoE of 1.2%/14%. With valuations also at 2.1x P/B – not too different from its private corporate banking peers, 12M risk-reward appears balanced, hence, maintain ‘hold’.