Positivity is setting in for YES Bank with the proposed equity capital raise of Rs 89 bn ($1.1 bn) from Carlyle and Advent International, with each investor potentially acquiring up to 10.0% stake in YES Bank. The capital will be raised through a combination of Rs 51 bn ($640 mn) in equity shares and Rs 38 bn ($475 mn) in equity share warrants. Bank proposes to issue 3.7bn equity shares on a preferential basis at a price of Rs 13.78 per share and 2.57bn warrants convertible into equity shares at a price of Rs 14.82 per warrant.
This confidence as well as growth capital will boost CET-1 by 3.84% to almost 15.7%. Also, since it is being raised close to the book value (at Rs 13.78 for share issue and Rs 14.82 for warrants), it will not be book value dilutive. With benefits of likely credit rating upgrade and optimal capital utilisation with improved growth profile, it is unlikely to be earnings or RoE dilutive.
An incremental trigger will be transfer of bulk of the bank’s stress pool to ARC, since it has signed a binding term sheet with JC Flowers ARC for strategic partnership in relation to the sale of identified stressed loans aggregating to nearly Rs 480 bn. The bank has net carrying value of Rs 83 bn against this stress pool in its books. It has received base bid of Rs 111.83 bn (~135% of carrying value of the above identified pool of assets). Management expects GNPAs to reduce by Rs 260 bn and net NPAs by Rs 83 bn as and when the deal is executed (anticipated by Q3FY23).
After pencilling in an RoA of 0.4% in FY22, driving it towards the FY23 target of 0.75% and FY25 target of 1.0-1.5% will require advances growth to rise to mid-teens and cost efficiencies, besides further improvement in NIM trajectory and sustained credit cost. The equity raise will provide confidence as well as growth capital to scale up RoA to targeted levels.
We see a turnaround in relevant operating metrics and improved confidence in the stability of the franchise. With these developments, we revise our target multiple to 1.2x FY24E ABV (vs 1.1x previously) giving us a target price of Rs 15.7 (earlier: Rs 14.0). We remain cognisant of the risks arising from net labelled exposure of 5.0%, delay in the resolution of stress pool, modest RoE profile during transition and supply overhang post the expiry of lock in shares. Maintain Hold.