01-01-1970 12:00 AM | Source: Emkay Global Financial Services
Sell Yes Bank Ltd For Target Rs. 10 - Emkay Global
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Higher restructuring, lower provision buffer remain irritants

* After a heavy loss in Q4FY21, Yes Bank returned to profitability in Q1FY22 with a profit of Rs2.1bn, mainly led by higher other income and lower provisions. GNPA ratio was up 20bps qoq at 15.6% as the bank resorted to heavy restructuring (Rs50bn; 3% of loans vs. 0.7% in Q4). We believe that the bank should prefer upfront stress recognition and a higher provision cover instead of token profits.

* Credit growth was subdued (down 1% yoy), while deposit growth (+39% yoy) was higher, albeit on a low base after last year’s scare. CASA stood at 27% but it was still far from its peak (38%). In our view, the road ahead will be challenging since even larger private banks are struggling on the CA front. NIM remained sub-par at 2.1%, hurting core earnings.

* The bank retained its medium-term RoA target of 1-1.5%, which we believe is optimistic given its core earnings profile. We estimate RoA/RoE at 0.8%/8% by FY24. The bank’s CET 1 stood at 11.6%, and its recent plans to raise capital were hurt by the RBI’s rejection to allow a separate ARC for the bank.

* We retain Sell with a TP of Rs10 (0.9x Sep’23E ABV), given persistent concerns about the bank’s asset quality, sub-par return ratios, and unfavourable risk-reward ratio with higher valuations (1.1x FY24E ABV).

 

Credit growth and margins remain sub-par:

Credit growth was weak at Rs1.7tn (down 0.5% yoy/2% qoq) mainly due to corporate drag. Retail growth was high at 31% yoy due to a low base. The bank expects 20% growth in retail in FY22; however, asset quality remains a concern in this portfolio. Deposit growth was high at 39% yoy (Rs1.6trn) due to a low base after last year’s scare. CASA stood at 27%, but it was still far from its peak (38%). In our view, the road ahead will be challenging since even larger private banks are facing challenges on the CA front. The bank has also cut SA rates recently, which may impact SA mobilisation. NIM improved by 50bps qoq to 2.1% due to lower interest reversal on NPAs/interest waiver, but remained sub-par vs. past trends. The bank has guided for 15% credit growth and expects margins at 2.8%, which looks optimistic.

 

Elevated asset quality risk persists:

Fresh slippages remained high at Rs22bn (5.4% of loans), mainly from corporate (Rs12.5bn) and retail (Rs7.6bn). However, GNPA ratio inched up only 19bps qoq to 15.6% due to upgrades of Rs17.2bn, in turn led by restructuring. The bank restructured Rs37bn of loans in Q1, higher than its anticipated restructuring of Rs25bn. Now its restructured pool stands at Rs49bn − 3% of loans vs. 0.7% in Q4FY21. The bank does not expect much restructuring in Q2. However, its SMA1/2 still stood high at 5%/2%, which the bank expects to normalize from Q2. Yes Bank carries specific PCR of 66% on GNPA, 92% on investments and 10% on restructured loans. The bank does not carry any contingent provisioning buffer, which we believe would keep credit costs elevated in FY22.

 

Outlook and valuation:

We expect the bank’s RoA trajectory to remain sub-par at 0.5-0.8% over FY23-24E vs. management expectation of 1-1.5%. We retain Sell with a TP of Rs10 (0.9x Sep’23E ABV) amid persistent concerns over its asset quality, sub-par return ratios, and unfavorable risk-reward ratio with higher valuations. Although the current management with regulatory/investor support has been able to avert bank failure, we believe that reorienting Yes Bank to a sustainable retail bank will require differentiated private banking management. Key risks to our call: Faster-than-anticipated business scale up and lower-than-expected NPA formation.

 

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