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Back in to the woods

* Yes Bank reported a heavy loss of Rs38bn (vs. est. loss of Rs8.7bn) in Q4FY21, mainly due to higher interest reversals on NPAs leading to a sharp margin contraction (down 200bps yoy/30bps qoq to 1.6%) and accelerated provisioning, including higher write-offs.

* Headline GNPA ratio fell qoq to 15.4% mainly due to higher write-offs. Restructured pool stood at 0.7% of loans, but another 1.3% of loans is pending for Q1FY22. With the raging second Covid-19 wave, we believe asset quality risk is likely to remain elevated, while RBI’s rejection to allow the bank to set up a separate ARC has dashed its hope of window dressing of B/sheet.

* Yes Bank has largely arrested the downtrend in deposits, but credit momentum remains weak (down 3% yoy), given its corporate de-bulking strategy. Going forward, the bank plans to double the retail book to Rs1trn in three years, and retains its medium-term RoA target of 1-1.5%, which we believe looks optimistic.

* We retain Sell and cut the TP to Rs10 (0.9x FY23E ABV), given continued concerns about the bank’s asset quality, sub-par return ratios and unfavourable risk-reward ratio with higher valuations.

NIMs drop with onset of NPA recognition and weak credit momentum: Credit growth remains bleak at Rs1.7tn (down 35% yoy/2% qoq) due to weak demand in the underlying corporate book, partly offset by healthy growth in retail (up 23% yoy) and commercial banking (up 12% yoy). Retail asset disbursements are trending upwards, rising to Rs75bn, mainly driven by secured lending. Deposit growth too is trending well post a deposit scare in Q4FY20 – up 54.7%yoy/11% qoq to Rs1.6tn, mainly led by strong growth in TDs and CASA despite reduction in SA rates. CASA ratio (ex. CDs) stands at 27.3%. NIM plunged to 1.6% (3.4% in Q3FY21) due to interest reversals of Rs7.5bn on NPAs and Rs1.4bn on interest-on-interest waiver on loans as per SC directive. Under a 3-year forward looking strategy, the bank expects retail advances to double to Rs1tn by FY24, sourcing from bank customers to grow 2x and CASA to touch 40%, which looks optimistic.

Asset quality risk remains elevated:

Reported GNPA improved by 420bps qoq to 15.4% vs. pro forma 19.6% in Q3, mainly due to heavy write-offs. Restructured pool for the bank stands at Rs11bn i.e. 0.7% of advances and further Rs25bn to be implemented in Q1FY22 (currently part of the 61-90 days overdue book). Provisions for standard advances include proactive provisioning of Rs2.5bn toward the Rs25bn restructuring anticipated. Yes Bank carries specific PCR of 66% on GNPA, 90% on investments and 10% on restructured assets. Retail collection efficiency is back to pre-Covid-19 levels at 96% vs. 89% in Sep’20 with a strong focus on book quality and collections. Yes Bank believes that the current level of capitalTier 1 at 11.2% is comfortable enough and strong recoveries expected in FY22 should take care of any incremental credit cost. Thus, the bank does not carries any contingent provisioning buffer, which we believe would keep credit cost elevated in FY22 as well, particularly in view of the second Covid-19 wave.

Outlook and valuation: We have cut our FY22/23E earnings estimates, factoring in higher credit cost/lower margins. We introduce FY24 estimates and expect RoA trajectory to remain sub-par at 0.5- 0.8% over FY23-FY24E vs. management expectation of 1-1.5%. We retain Sell and cut the TP to Rs10 (0.9x FY23 ABV) amid continued concerns over its asset quality, sub-par return ratios and unfavorable risk-reward ratio with higher valuations. 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 and lower-than-expected NPA formation, including via sale of assets.

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