Yes Bank back on Kotak Securities’ coverage radar; outlook remains grim, shares down 2%

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September 16, 2020 11:20 AM

Private sector lender Yes Bank is back on Kotak Securities’ coverage radar but the outlook for the troubled bank remains grim.

Yes Bank, SBI, Yes Bank has fully repaid the 50,000 crore provided by RBI, special liquidity facility, SLF, Yes Bank chairman Sunil Mehta, default, yes bank management, yes bank bailout packageYes Bank reported net income of 1.3 billion rupees (17.7 million dollars) in the three months ended Sept. 30

Private sector lender Yes Bank is back on Kotak Securities’ coverage radar but the outlook for the troubled bank remains grim. Kotak Securities, re-initiating the coverage of the bank, acknowledged the bank’s efforts to recover from issues that marred its operations earlier this year, but the brokerage went only as far as giving a ‘Sell’ call with a target price of Rs 10 per share. Yes Bank shares were trading down 2% on Wednesday morning at Rs 14.27 per share. Shares of the bank are flat for the last one month, dancing between gains and losses on a regular basis.

The troubled lender was part of a SBI led restructuring plan which saw a number of private financial institutions line up to bail the bank out, infusing fresh capital and writing off some of the bank’s bonds. These private financial institutions included ICICI Bank, HDFC, Axis Bank, and Kotak Mahindra Bank, among others. However, six months down the lane with a new management, Yes Bank has moved in the right direction but the road to recovery is still long. The bank recently managed to shore up capital by Rs 15,000 crore through a follow on public offer. “However, this recovery is unlikely to be easy as the bank has the challenging task of rebuilding confidence and deliver RoE through an asset mix where competence is untested,” analysts at Kotak Securities said in the report.

Although the stock is down 76% from its March highs, Kotak Securities adds that it is still trading at a premium valuation. “The bank is trading at a premium to book as compared to ~1X FY2022E book for IndusInd Bank and 0.9X FY2022E book for RBL Bank,” it said. The report adds that Yes Bank’s books provide no validation for this premium valuation. “In what appears to be atypical of valuation, we are quite surprised at the premium valuation that Yes Bank is trading at in the market despite its recent history. A combination of factors could be driving this premium but we would want to be watchful,” they added.

Kotak Securities has said that it would be wrong to assume that Yes Bank’s balance sheet has hit the reset button and that road to recovery might be easy. It further ridiculed the assumption that the fear of deposit outflows has receded. The report further highlights that a large number of Yes Bank shares are under a lock-in. Kotak Securities estimates that around 45% of the lenders shares are in some form of a lock-in at present. With large banks holding a good amount of shares in Yes Bank, their decision to sell could hit the share price. 

In the medium term, Yes Bank needs to rebuild the deposit franchise by gaining the trust of customers, ensure stability at the top management level, reconstruct its loan book, and normalise credit costs. The bank has in recent months seen some positive rating upgrades from domestic and foreign rating agencies post the large capital infusion and has revised business strategy. “However, revenue growth is likely to remain subdued as the bank shifts the asset mix to a granular business from the riskier and chunkier corporate segment and rebuilds the liability business,” Kotak Securities said.

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