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Steady, but underlying portend volatility

Yes Bank reported better-than-consensus Q3FY22 PAT of INR2.7bn, but underlying remains vulnerable—indicating the situation is far from being stable. Despite better business traction, asset quality remains a problem of a large magnitude. Highlights: i) Deposits grew 4% QoQ and advances grew 2% QoQ. ii) Though PCR is 65%-plus, a high stressed pool and an uncertain environment do not portend an easy resolution.

There are some initial signs of stabilisation though. Even so, uncertainty around stress, selling restrictions on private banks and an uncertain operating environment preclude any meaningful assessment of business direction and residual net worth valuation. Hence, we maintain the stock ‘UNDER REVIEW’.

Stress pool remains high as pockets of uncertainties persists

The bank’s identified pool of stressed advances of >INR50bn forms more than 25% of its book. While slippages were lower QoQ (at INR9.8bn), the quarter marks a further rise in restructured book to INR69bn (INR62bn in previous quarter), reflecting sustained asset quality pressure points. The bank holds ~65% provisioning on these advances, but absence of any substantial provisioning buffer – contrary to almost all peer banks – dampens outlook. Add to that the current challenging environment, which only adds to problems. The quarter also saw relatively soft recovery//upgrade, which we believe is crucial to maintaining underlying momentum. While the bank’s asset quality has been steadily improving, its sustenance remains crucial to better end-cycle outcomes.

Business momentum: Signs of improvement visible

Deposits showed definite signs of stabilisation, registering >4% QoQ, while loan book grew by 2% QoQ. Margins also improved 20bs QoQ, supporting the overall NII traction, leading to a better operating profile. Loan book continues to move towards retail lending (excluding MSME exposure), now forming 34% of the book (32% in previous quarter). While some green shoots are visible, a meaningful recovery will require ‘strenuous’ effort, consistency and some macro tailwind—a long way to go.

Outlook: Uncertainties persist; stock ‘UNDER REVIEW’

Though capital raising is past, deposit accretion and asset quality are the key elements to monitor, not to mention stakeholder confidence. Evolution locus over the next two–three years is very much an open question, and that in our opinion lies more in the realm of speculation than analysis. Maintain the stock ‘UNDER REVIEW’.

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