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Aggravating asset quality fears outweigh operating performance turnaround

Yes Bank’s Q3FY21 earnings aggravate fears about its asset quality issues. Portfolio vulnerability becomes visible from: 1) spike in standstill NPLs (from 1.5% to 5%), SMA-2 pool (from 2.4% to 4%), SMA-1 (from 1.6% to 7.3), and 2) additional restructuring outside of this pool at 3.2% over and above the labelled nonperforming assets at 22%. We revise estimate of cumulative slippage run-rate to >13% (earlier 10%) and cumulative credit cost to 6% (5%) over FY21E/FY22E. Elevated credit cost offsets operating metrics improvement, leading to earnings cut. The quarter had positive surprises in the form of new CASA accounts (220k added in Q3FY21), retail + SME disbursements outpacing the set target (of Rs120bn), retail fee traction (up 38% QoQ), cash recoveries of Rs15bn, treasury profit of Rs5.4bn, and cost containment (down 8% QoQ). However, asset quality fears outweigh the turnaround in operating metrics and we expect the recently proposed equity raise to depress RoE. Maintain HOLD with revised TP of Rs16 (earlier Rs17). Key risks: 1) asset quality issues leading to further capital erosion; 2) lock-in of shares and lower float boosting stock value beyond fundamentals.

* Asset quality concerns merely being deferred and seem far from over: Yes Bank’s stress pool aggravate fears around its asset quality. Portfolio vulnerability becomes visible from: 1) spike in standstill NPLs to 5% (restructuring invoked - 15% of this pool), SMA-2 at 4% (restructuring invoked - 47%), SMA-1 at 7% (20% restructuring invoked); 2) additional restructuring executed at 2.5% plus restructuring invocation of 0.7% (outside of standstill, SMA-1/2 pool); 3) labelled non-performing assets at 22%. We therefore estimate a cumulative slippage run-rate of >13% and cumulative credit cost of >6% over FY21E/FY22E and expect depressed earnings.

* Collection efficiency still lagging in SME and corporate segments: Collection efficiency in retail improved to 96% (from 89% in September) against 97% preCovid. However, MSME collection efficiency still lags at 94% of pre-Covid era. Also, collection efficiency in the corporate segment, which comprises 52% of the book, remains much lower. While corporate stress was largely anticipated, we need to watch out for behaviour of retail and MSME portfolios – almost 3% of which is already in standstill NPLs and 1% in SMA-2 (excluding the restructured invocation).

* Retail and MSME segments – emerging pillars of credit: Yes Bank’s mediumterm objective is to build a granular portfolio skewed towards retail and MSME. Retail disbursements surpassed its own target and 85% of origination is towards secured lending – Rs74.7bn (almost double QoQ). Retail now constitutes 28% of the book. SME disbursements at Rs44.5bn are higher than pre-Covid levels.

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