Published on 18/05/2017 1:53:19 PM | Source: Motilal Oswal Securities Ltd
Buy Yes Bank Ltd For Target Rs.2,110.00 - Motilal Oswal
Divergence with RBI audit fully accounted for
Overall net stress loans just at ~2.2% despite accounting for divergence
* Reported GNPA % was 76bps for FY16 whereas, RBI estimated GNPAs were ~5%. Our interactions from bankers suggest, communication from RBI related to divergence in NPA reporting comes after the Annual Financial Inspection (AFI - normally 1-2 quarters lag post closure of books). From rule based accounting perspective banks may keep account standard, however if there is inherent weakness in the account as per regulators view then it would be asked to be classified as NPA
* Divergences are possible due to difference of opinion between RBI and Banks and this year onwards RBI has mandated banks to report the same in the Annual report. YES is the first bank to come out with the annual report and disclosure (first year of disclosure for banking sector) which in our view created a bigger issue. ICICIBC and AXSB has reported INR53.8B (1.2% of loans; 2.5%+ of corporate loans) and INR94.8B (2.5% of loans; 6%+ of corporate loans) in their result conference call.
* YES has fully recognized divergences in FY17 earnings and now there is no back log of same in the ensuing quarter. Of the total divergence of ~INR41.8b, INR10.4b is outstanding as NPA and rest are either repaid, exited or have demonstrated improvement in behavior.
* YES remains our top pick in the mid-sized private banks with strong capitalization (CET1 of 11.4%), focus on return ratios (ROA of 1.8% and ROE of 20%) and market leading growth rates (expect atleast 2x of the industry growth). AR indicates towards significant improvement in Liability profile (a key concern in the past). We reiterate buy with a target price of INR2110/share.
Divergences fully accounted for–No recognition impact in ensuing quarters
* YES Bank in its FY17 AR has declared a divergence of INR41.8b/33.2b/8.6b/5.6b in FY16 GNPA/NNPA/NPA provision/PAT between reported and RBI AFI numbers. Of the total divergence of ~INR41.8b, INR10.4b is outstanding as NPA and rest are either repaid, exited or have demonstrated improvement in behavior. Of the o/s NPA of INR10.4b, one large account amounts to INR9.1b which bank expects to recover soon (on back of M&A action).
* In FY17, bank reported upgrades (INR3.7b) and recoveries (INR8.5b) of INR12.2b and large part of which in our view is related to accounts being classified as NPA from RBI divergence letter during the year. In FY16, upgrades and recoveries were INR2b if one were to assume the same for FY17 then divergence related upgrades and recoveries were ~INR10b.
* Bank had also sold INR9.6b (INR0.6b in FY16) worth of accounts to ARCs in FY17 and we expect it also to be largely driven by divergence related accounts.
* Hence of the total divergence, in our view, INR12b+ (INR41.8b divergence = INR10b recoveries/upgrades+ INR10.4b still NPA+ INR9b sold to ARC+INR12.4b repaid) have been repaid in the normal course of business during the year .
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