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Weak core performance; asset quality risk persists

* Despite weak core performance, Yes Bank reported a profit of Rs2.2bn (est: Rs1.5bn), mainly due to lower provisioning. The GNPA ratio fell 60bps qoq but was still high at 15%, while the restructuring pool rose 63bps qoq to 3.6%. The bank plans to launch an ARC with minority interest to take over stressed assets from the bank’s balance sheet.

* Credit growth accelerated to 6% qoq mainly due to traction in retail loans (mainly mortgages). The bank expects ~15% credit growth in FY22. Deposit growth (+30%yoy/8% qoq) too was higher, albeit on a low base post last year’s scare. CASA improved by 200bps qoq to 29%, but NIM remained lower at 2.2% due to interest reversals on NPA.

* The bank retained its RoA target of 1% by FY23E and 1-1.5% in the medium term, which looks optimistic given its weak core earnings profile and asset quality overhang. We estimate RoA/RoE at 0.4-0.8%/4-8% by FY23-24E.

* Retain Sell with a TP of Rs10 (0.9x Dec’23E ABV), given persistent concerns around the bank’s asset quality, sub-par return ratios and unfavourable risk-reward ratio (trading at 1.1x FY24E ABV).

Credit growth picking up, led by retail; but margins remain sub-par:

Credit growth picked up, up 6% qoq to Rs1.7trn. Retail growth was high at 39% yoy/9% qoq, in line with management’s focus on building a secured retail book, mainly led by mortgages and VF. The bank expects 20% growth in retail during FY22; however, asset quality remains a concern in this portfolio. Deposit growth was high at 30% yoy/ 8% qoq to Rs1.6trn, driven by CASA, despite a cut in the SA rate. CASA growth at 54% yoy/16% qoq was led by new customer additions and increasing CASA balances. NIM improved by 10bps qoq to 2.2% but remained sub-par vs. past trends due to interest reversal on NPAs. The bank has guided for 15% credit growth and margins at 2.8% in FY22E.

Asset quality remains weak:

Fresh slippages remained high at Rs17bn (4.3% of loans), mainly from corporates (Rs7.5bn), including Future Retail and few real estate corporates. Retail slippages were high at Rs8.9bn. However, the GNPA ratio improved by 63bps qoq to 15% due to recovery of Rs3bn, write-offs of Rs2.7bn and upgrades of Rs9.7bn, in turn led by restructuring. Restructured pool now stands at Rs61bn – 3.6% of loans vs. 3% in Q1FY22. SMA1/2 fell to 2.1%/1.1% from 5%/2.1% in Q1FY21 with the economy opening up. Yes Bank carries a specific PCR of 66% on GNPA, 92% on investments and 10% on restructured loans. It has made 10% provision of Rs3.3bn on Telecom exposure, which remains standard. 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. Although 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 be a tall task. The bank’s CET 1 too remains sub-par among peers and thus would call for frequent dilution at lower valuations. Key risks to our call: faster-than-anticipated business scale up and lower-than-expected NPA formation.

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