Yes Bank reported one of its worst quarters with a ~67% erosion of net worth on the back of high provisions for asset impairments. The bank has seen a reprieve with a capital infusion from SBI and private banks. The liquidity test would begin when the moratorium is lifted soon. There are significant challenges on capital, asset quality, liability management and costs which make it challenging to provide a fair opinion. Move rating to RS (rating suspended).
Provision for asset impairments leads to a substantial loss for the quarter
The balance sheet has substantially deteriorated from Q2FY20 levels. (1) Gross NPLs increased to 19% from 7% of loans while net NPLs increased marginally to 6% from 4.4%. Provision coverage ratio stands healthy at 73%. SMA 1 and 2 and stressed investment book is ~13% of loans suggesting that there is still further pain pending to be recognised. (2) The bank reported a high loss primarily on account of provisions for bad loans resulting in ~67% erosion of 2QFY20 net worth. (3) The bank has breached regulatory ratios with (a) CAR at 4% of which tier-1 ratio is at 2% which includes CET-1 ratio at 0.6%. AT-1 is yet to be marked down (b) SLR ratio has not been maintained and (c) LCR ratio was at 21% as of March 05, 2020.
One round of capital infusion in place
Equity infusion is currently at Rs 100 bn, which has been made by SBI (48% share) and other private banks. The management is of the opinion that the pro-forma balance sheet would have a CAR of 13.6% with CET-1 at 7.6% and the AT-1 bonds written down.
Wading through the liquidity challenge as the moratorium is lifted
The bank saw its deposits reduce by 35% since Q2FY20. The bank has announced that it would remove the moratorium on deposit withdrawal on Wednesday (March 18). This would be the next test as we would expect a large withdrawal to immediately follow suit.
Near term business remains unclear
The bank currently is facing a whole host of issues: (a) an uncertain liability profile led by trust deficit, (b) capital constrained model that would require large shrinkage of loans or raising of further equity (c) cost structure that is unlikely to be very unfavourable given the sharp decline in loan book and slow reduction in costs and (d) stress level that is still unrecognised in earnings. Given these constraints, we are less confident of the earnings print that we have forecasted. We move our rating to RS from SELL.