Several risks exist outside CAR and downward revision to FV cannot be ruled out. Sell remains. FV revised to Rs 70 (from Rs 170 earlier).
Yes Bank reported a negligible earnings print as operating profits declined 20% y-o-y while provisions increased 2.9X y-o-y. The bank reported high slippages resulting in gross NPLs moving to 5% of loans (50% q-o-q) and the ‘below investment grade’ rose sharply to 12% of loans (300bps q-o-q). The steep correction of stock price could entail significant dilution to book value/share as capital is not being raised at a point of business strength. Several risks exist outside CAR and downward revision to FV cannot be ruled out. Sell remains. FV revised to Rs 70 (from Rs 170 earlier).
Balance sheet deteriorating rapidly; earnings declined 90% y-o-y
Yes Bank reported 90% y-o-y decline in earnings on the back of (i) muted NII growth (NIM compressed 30 bps q-o-q to 2.8% and sluggish loan growth), (ii) 25% y-o-y drop in non-interest income and (iii) 1.9X y-o-y increase in provisions (MTM related provisions on two financial services companies). CET-1 ratio declined 40 bps q-o-q to 8%. Growth in RWA at 20% y-o-y is higher than 10% y-o-y loan growth. Deposit growth was muted at 5% y-o-y. CASA ratio declined 300bps q-o-q.
Sharp spike in slippages in Q1FY20
Yes Bank reported 10% slippages in Q1FY20; the highest in the past 10 years. There was a disproportionate contribution to net corporate slippages, mainly from the ‘BB’ and below book. Despite higher slippages, there has been a sharp increase in ‘BB’ and below rated book of 230 bps q-o-q to 9.5% of total corporate exposure. Slippages are expected to remain high over the next few quarters and further deterioration in asset quality can pose significant pressure on earnings and tier-1 ratio.
Getting into a negative spiral with the bank trading below book value
We have been cautious on the extant business model of YES for the past few years as it has relied on excessive dependence on fees or structuring in corporate loans that was strong on collateral but not necessarily backed by strong visibility of cash flows, exposing the balance sheet to risks. As we speak, we are seeing the risks unfolding. We see a few key risks despite the price decline as a valuation discomfort: (i) balance sheet risks have increased further and we would need to wait for a couple of more quarters, (ii) revenue decline could accelerate as the bank could start pulling back loan to maintain CAR (iii) weak revenue growth could result in a much slower trajectory for RoE improvement (iv) risk to weakening of liability franchise and human resources is quite high and (v) the impact of book value dilution if the bank reports any sharp losses and raises capital below book. We maintain Sell and revise fair value to `70 (from `170 earlier) valuing at 0.9X March 2021e book for weak RoEs in the medium term. Clear risks to fair value estimation given the above concerns and we don’t rule out further cuts to our earnings estimates.
Further deterioration in asset quality
GNPL increased 180 bps q-o-q to ~5%: Reported gross NPL increased >50% q-o-q to Rs 120 bn (up 3.3X y-o-y) to 5% of loans (up 180 bps q-o-q). Net NPL increased >50% q-o-q on absolute terms to Rs 70 bn with NNPL ratio at 2.9% of loans (up 105 bps q-o-q). Total stressed assets increased 180 bps q-o-q to ~5%. The share of ‘BB’ and below rated corporate assets saw a steep spike in Q1FY20 by 230 bps q-o-q to 9.4%.
Maintain cautious stance on asset quality: The bank has high exposure towards a few stress sectors like real estate. Additionally, they have been rapidly expanding the corporate book including sharp expansion in the EPC sector (up 200 bps in Q1FY20 to 10% of overall advances). We would take a more constructive view over the next few quarters as the risk of default from some of these sectors is still quite high.