We met the Chief Risk Officer of Yes Bank recently. We believe that new RBI guidelines for resolution of stressed assets is likely to aid in differentiation between banks on basis of their (i) balance sheet strength, (ii) underwriting & resolution practices, (iii) pro-activeness in dealing with potential stress. In our view, Yes is likely to be one of the beneficiaries due to its competitive advantage in underwriting and structuring. The bank believes that respective schemes for current non NPL stressed assets under previous RBI dispensations such as SDR, S4A, 5/25 etc., have been “implemented” and hence these accounts are unlikely to slip into NPL.
Minimal exposure to accounts likely to enter into IBC
Yes Bank is likely to have minimal impact from accounts which are likely to be referred under Indian Bankruptcy Code over next 6 months due to: (i) low exposure to large borrowers (Rs 20 bn+) for whom resolution plan is unlikely to materialise, (ii) proactive resolution measures well before completion of 180 days post default. As such Yes Bank doesn’t have significant exposure to consortium loans, including bilateral exposures to stressed balance sheets. Given disclosed SMA-2 levels for the bank were in low-mid single digits in FY16, movement into NPL post two RBI divergence reviews since then is likely to have further reduced, in our view, to low single digits.
Key beneficiary of uptick in sector loan growth; top pick
Sector level data and commentary of several industry participants including Yes indicate resurgence of demand in credit markets. With comfortable capital position, and granular mix, Yes Bank is among the best placed in the industry to benefit from this growth uptick across segments. Moreover we think Yes Bank represents the sole opportunity among private banks to accrue premium value on account of balance sheet transformation in favour of retail. We maintain our Buy rating and highlight Yes Bank among our top picks in the sector.
Price objective basis
We set our PO for YES at Rs 475 based on 3.8x P/B FY19e adjusted book value. Our target multiple is derived using the growth adjusted P/BV method, with the following key assumptions: sustainable long-term ROE: 20%, cost of equity at 11.75%, sustainable growth rate: 8%. We expect
Yes’ valuation multiples to re-rate as its loan market share may nearly double over the next three years, led by: (i) superior delivery on the retail book, (ii) likelihood of being a key beneficiary of SME book growth, (iii) improvement in the bank’s liability profile as distribution expands. Alternatively, our PO is based on a c.20x P/E on our FY19e for an EPS CAGR of 25%+.
By: BofA Merill Lynch