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Stress recognition weighs on profitability; FY22 priorities set towards medium-term objectives

YES Bank’s (YES) Q4FY21 loss manifests the aggravated fear of asset quality pangs post the disclosed stress pool including standstill NPA, SMA-1/2, restructuring, etc. of around 18% (of customer assets) in addition to GNA exposure. From this pool, 7% (Rs119bn) slipped into NPA and 1.5% (Rs25bn) was restructured. Provisioning of Rs52.4bn towards this stress and interest reversals of Rs7.4bn resulted in a loss of Rs37.9bn.

Post the slippages, recoveries and write-offs in Q4FY21, YES exits FY21 with net labelled exposure of 8%, SMA-2 of 2.6%, and SMA-1 of 5%. Improved recovery momentum and controlled incremental slippages can help manage credit cost sub-3% in FY22/FY23E. The bank’s priority for rebuilding the trust in franchise, focus on granular advance growth (led by retail, SME and working capital financing) and improving CASA ratio was reflected in Q4FY21 as well. Maintain HOLD with a target price of Rs16. Key risks: 1) covid resurgence causing further stress; 2) lock-in of shares and lower float boosting value beyond fundamentals.

* Slippages spike to 7% of advances: Gross slippages with flow-through from standstill account (of Rs83bn in Q3FY21, or 5%) and SMA-1/2 pool (of Rs188bn in Q3FY21) came in at Rs119bn (~7% of advances). Additions were primarily from the corporate segment and specifically covid-impacted sectors (19% from commercial real estate; 14% from tour, travel, hospitality; 8% from infrastructure; 7% from media / entertainment). However, GNPAs were managed at 15.4% and at 3% lower QoQ (in absolute terms) due to accelerated write-offs of Rs103bn and recoveries & upgrades of Rs25bn. Moreover, the bank is of the view that post recoveries of Rs49bn in FY21 (Rs20bn in Q4FY21), recoveries are more likely to outpace slippages in FY22. Hence, the stress pool is likely to consolidate and come off in the current fiscal. We expect GNPAs to come to 13%/11% by FY22E/FY23E. The bank created provisions of Rs65bn on incremental slippages thereby taking coverage to 79% (from 69%).

* Cumulative stress pool at 20%: YES’s cumulative gross NPA and labelled exposures amount to Rs414.6bn, equivalent to 23% of advances plus corporate investments. On this stressed pool, the bank has total provisions of Rs265.6bn or 64% of total stressed pool, while restructuring has been invoked on Rs25bn (~1.5% of advances). Post the slippages, recoveries and write-offs in Q4FY21, YES exits FY21 with net labelled exposure of 8%, SMA-2 of 2.6%, and SMA-1 of 5%. We therefore anticipate cumulative slippage run-rate of 4.2%/2.6% and credit cost of 2.5%/2.0% over FY22E/FY32E respectively

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