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YES Bank reported a mixed set of Q4FY23 earnings with healthy business growth,NIMs and improvement in headline net stress, though profitability (RoA at 0.2%) remained weak due to continued investment in franchise and retail orientation.

Despite sectoral headwinds, we have been impressed by YES Bank’s remarkable progress in ‘retailisation’ of balance sheet, sharp clean-up in asset quality and improved capital levels. The bank appears to be the preferred banker to ‘Digital India’ and has disproportionate market share in digital payments. However, we remain concerned on its muted operating earnings profile (~1.0% for FY23), where we see only gradual improvement going ahead (1.2-1.3% for FY24-25) due to relatively higher gestation period of retail business and intense competition. Despite building in modest credit costs at ~50bps for FY24/25, we see the bank reporting sub-par RoAs at 0.6-0.7%. YES has additional lumpy risks on AT-1 bonds write-offs litigation (~300 bps of CET 1 impact in worst case), which is pending in the Supreme Court. We revise our FY24 earnings estimates and introduce FY25 estimates. We arrive at our new target price of Rs13.5, valuing the stock at ~0.9x
FY25E ABV. Risk rewards appear unattractive with the stock trading at ~1.0x FY25 ABV for single digit RoE. We downgrade the stock to REDUCE from HOLD.

* Fee growth strong but elevated opex limits PPOP margins: The bank has been focusing on retailisation of balance sheet and has been acquiring customers at a steep pace (>1.3mn CASA customers run-rate). Retail disbursements have also been
strong. Overall, retail fee has been growing at a staggering 46% YoY (43% YoY for FY23) though on a low base. Overall non-interest income as a %age of assets has been muted at ~1.2%. At the same time, ‘retailisation’ of balance sheet has been
attracting higher investment in the franchise. Cost to assets for the bank has been elevated at 2.6% and cost-to-income ratio has been steep at >70%. While we are confident of improving NIMs and fee income for the bank, elevated opex would mean
only gradual improvement in PPOP margins for the bank.

* Strong retail growth but overall growth moderated by corporate: Advances growth was healthy at 4.5% QoQ (and 12% YoY) led by retail (up 8% QoQ) and mid-corp (up 9% QoQ), while corporate book grow declined 3% QoQ. Though loan growth lags  system growth of >15%, it is considerably up from 8.5% in FY22 and decline in growth in FY21. Overall, management has guided for average loan growth of 15-20% for FY24 and is comfortable with CD ratio of ~90% vs 92% for Q4FY23. We, however,
are building-in loan growth of ~10% CAGR for FY24-25E due to higher competition.

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