IGI Logo

Rebuilding deposits, but no escape from asset quality fallout

* Yes Bank has sustained profitability at Rs1.5bn (vs. estimate of Rs8.7bn loss), aided by treasury gains and contained provisions as NPA formation is deferred due to SC stay. Overall stress pool stood high at Rs185bn (11% of loans), indicating continued asset quality risk.

* The bank carries Covid-related contingent provisions of Rs27bn (1.6% of loans), which is still low factoring in higher stress pool. The bank has restructured over Rs81bn of loans (4.8% of loans), which is highest in the industry till now. It awaits regulatory approval for Independent ARC to transfer and manage its stress assets.

* The downtrend in credit/deposits has been largely arrested and incremental focus is on building retail asset/liabilities, but sustaining momentum will be an arduous task. Despite CET 1 of 13.1%, the bank plans to raise capital again to the tune of Rs100bn (4.2% of RWA) probably to secure capital before asset quality fallout begins, leading to further dilution for existing investors.

* Retain Sell with a TP of Rs11 (0.9x FY23 ABV), given sub-par return ratios and unfavourable risk-reward with higher valuations. We believe that the transfer of NPAs to a separate ARC (somewhat similar to IDBI in 2003) probably means window dressing standalone bank B/sheet, but we need to see the extent of hair-cuts, structure of ARC and recovery record in the ARC, which is not inspiring in case of IDBI SASF.

Business downtrend arrested; NIMs could drop as NPA recognition begins: Credit book downtrend has been arrested (up 2% qoq/down 9% yoy) led by a higher gross retail disbursement (Rs76bn in Q3 vs. Rs38bn in Q2), partly offset by a continued decline in corporate book. Deposits growth is trending well post a deposit scare in Q4FY20 – up 8% qoq, mainly led by CASA and high cost TD accretion including corporate. However, rebuilding the retail deposit franchise with a scale will be a challenge. NIMs look optically higher at 3.4% benefiting from better cost management, but could come under pressure as interest reversal on NPAs begin.

Asset quality risk remains elevated: Reported GNPA improved by 46bps qoq to 15.36% mainly due to SC Stay. However, loans to the tune of Rs83bn (5% of loans) are not classified as NPA due to SC stay. In Q2, these loans were Rs24bn (1.4% of loans). Overall stress pool including SMA 2 (65bn, 4% of loans), unrecognised NPAs (+90 DPD – Rs83bn (5% of loans) and other restructured loans (31bn, 2% of loans) stood high at Rs185bn (11% of loans). On an overall basis, the bank has restructured over Rs80bn of loans (4.8% of loans), which is highest in the industry. The bank carries Covid-related provisions of Rs27bn (1.6% of loans), which is still lower than larger peers and otherwise higher stress pool for the bank. The bank is planning to launch an ARC, with investors on board, where identified stressed loans will transferred and managed independently.

Outlook and valuation: Retain Sell with a TP of Rs11 (0.9x FY23 ABV) given sub-par return ratios and unfavorable risk-reward with higher valuations. We believe that the transfer of NPAs to a separate ARC (somewhat similar to IDBI in 2003) probably means window dressing standalone bank B/sheet, but we need to see the extent of hair-cuts, structure of ARC and recovery record in the ARC, which is not inspiring in case of IDBI SASF. Though current top management with the help of regulatory/investor support has been able to arrest bank failure, but re-orienting into a sustainable retail bank will require a differentiated private management. Key risks to our call: Faster and sustainable business growth, lower-than-expected NPA formation and higher-than-expected recoveries from stress pool.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer