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Yes Bank reported Q1FY20 pre-provisioning profit ~40% higher than our estimates, but the bulk of the surprise came from treasury gains while margins continued to disappoint. A heavy MTM provision on its investments in two large financial service players resulted in profit coming in at Rs1.14bn – almost half our estimates. More importantly, CASA deposits declined QoQ, which is a concern in addition to continued delay in capital raising, now guided to be a Q2 event. Does the market have patience to wait for two more months for the capital raising as further deposit erosion could hamper that effort as well? As we factor-in a 50% probability of this capital raising, we lower our target price by ~45% to Rs108, implying a target P/ABV multiple of ~1x and upgrade the stock to ADD (from Sell).
* Q1 summary: Credit and deposits both contracted sequentially. Credit contraction was due to effort to conserve capital as the bank’s CET-1 ratio has hit the regulatory floor of 8%. Deposit contraction was due to a significant decline in CASA deposits – about 9% QoQ – and almost a 300bps decline in CASA mix to 30%. Additionally, margins declined ~30bps QoQ to 2.8% due to fall in CASA mix and elevated slippages at 10%. Other than treasury profits, fee trends remained weak while the bank’s plan to ramp up distribution could lead to further cost pressures.
* Earnings and asset quality: This remains a concern as not only were there significant additions to the sub-investment grade book as also slippages from the same but, additionally, a part of the investment book saw rating downgrades leading to MTM provisions. Putting both together, credit costs came in at 221bps vs 218bps in the prior quarter. With several events needed to happen to arrest this fall in asset quality, we remain skeptical of a return to an RoA of 1% until FY21E; hence we cut our earnings estimates by 55% and 26% for FY20E and FY21E respectively.
* Valuations and rating: We have set our target price based on a 50% probabilityweighted case of a US$1bn capital raising this year. We thereby arrive at a weighted RoE of ~10% and target multiple of 1.1x P/Adj.book. This implies a target price of Rs108, a 10% upside, translating into an ADD vs our erstwhile Sell rating on the stock.
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