As negative news flow on Yes Bank’s governance issues continue unabated, we ask ourselves as we did with ICICI – Is this time any different?
As negative news flow on Yes Bank’s governance issues continue unabated, we ask ourselves as we did with ICICI – Is this time any different? We decide to look at Sir Templeton’s words of wisdom with a twist – and reiterate our Buy stance on YES.
We look to when ICICIBC was in similar predicaments in Apr’18 & Feb’16, being put to the test as negative newsflow led to derating. However, with the benefit of hindsight, these proved to be the best times to buy, as in both instances the stock delivered high returns in a short time as results were strong.
We see YES in a similar situation with concerns akin to ICICI’s (not a particularly proud moment!), but as events stabilise, we expect returns to improve sharply. While there are obvious differences/risks, such as tight liquidity and weak capitalisation, we present scenarios of potential outcomes. Several governance issues were highlighted in the media – (a) divergence, (b) RBI forced CEO change, (c) board overhaul, (d) lending to specific NBFCs and (e) quasi-promoter pledges. We agree to the fact that some of these clearly point to governance lapses.
Two fundamental differences exist between YES and larger corporate peers – (a) lesser capitalised and (b) higher dependence on wholesale funding, making YES vulnerable to liquidity issues. We believe liquidity is the more critical of the two and all the rating agencies have reiterated that the liquidity situation at the bank is comfortable. Also, YES now has more than 57% of deposits as CASA & Retail TD, with low dependence on short-term instruments. While we retain credit cost guidance of 70bps for FY20E, we reduce growth assumptions and multiples leading to 3% BVPS cut and 25% TP cut to Rs 320 (from Rs 430) implying 100% upside.