Higher provisioning on sharp increase in NPAs weigh on performance
Yes Bank is India’s fourth-largest private sector bank. The bank provides products, services and digital offerings to corporate, retail and MSMEs.
• Loans & Advances declined 6.3% YoY, due to 15.0% decline in the Corporate Banking division representing 61.9% of total loans.
• Net interest margin (NIM) declined ~60bps YoY and ~10bps sequentially, due to higher cost of funds, fresh slippages and decline in loans.
• GNPA/NNPA ratio increased sharply to 7.4%/4.4% in Q2FY20 vs. 1.6%/0.8% in Q2FY19, as a result of increasing bad loans.
• Given the weakening asset quality, declining margins and loan volumes, we revise our target price to Rs. 61 based on 0.85x FY21E adj. BVPS, and retain our REDUCE rating.
Loan book growth tapers out
The bank’s loan book registered 6.3% YoY decline as the management continues to cut down on its exposure to the corporate exposure. Corporate banking advances (representing ~61.9% of the total loan book) fell 15.0% YoY. Retail banking continued to post a healthy 29.7% YoY growth in its loan book. The bank’s deposit base declined 6.0% YoY, while CASA ratio was down 300bps YoY to 30.8%, impacted primarily by decline in Savings accounts deposits, , which imply higher cost of funds going forward.
Margins continue downtrend
NIM declined ~60bps YoY to 2.7% in Q2FY20 due to the impact of ~Rs. 228cr of fresh slippages. Non-interest income declined 35.8% to Rs. 946cr in Q2FY20. Operating expenses were up 9.8% YoY as the bank drew funds to meet priority sector lending targets. Provisions during the quarter jumped 42.2% YoY to Rs. 1,336cr, with most of them towards credit costs which stood at 69bps in Q2FY20 (vs 18bps in Q2FY19). Net profit plunged 162.2% YoY to record a loss of Rs. 600cr, which was impacted by a onetime deferred tax adjustment of Rs. 709cr as the company migrated to the lower corporate tax regime. Adj. PAT stood at Rs.109 cr (vs. Rs. 965cr in Q2FY19).
Worsening asset quality
Gross NPAs and Net NPAs each rose sequentially by 41.7% in Q2FY20. The company reported fresh slippages of Rs. 5,945cr while recoveries and upgrades amounted to Rs. 867cr. The Corp. BB and Below exposures rose 6.6% YoY on account of downgrade of already recognised stressed accounts and adverse credit developments in accounts such as Altico, and Café Coffee Day. The management has taken measures to reduce its exposure to NBFC/HFC’s, which resulted in reduction of Rs. 1,750cr in gross outstanding exposure.
Key concall highlights
* The bank has raised USD 273mn via Qualified Institutional Placement in August 2019 to shore up its capital.
* Management increased its FY20E guidance for credit costs to 225-250bps.
Outlook & Valuation
We remain cautious on the bank’s growth prospects on account of the rise in credit costs, increase in slippages and declines in loan book. We value the bank at Rs. 61 based on 0.85x FY21E adj. BVPS and maintain our REDUCE rating on the stock, with capital infusion the key factor to watch out for.
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