Yes Bank's Q1FY19 results (Neutral) - In line PAT, mixed earnings quality

Q1FY19 results

• YES Bank’s PAT of Rs12.6bn grew 31% yoy and 7% qoq. While PAT was in-line, quality of earnings was mixed. Strong loan growth of 53% yoy and 6% yoy, a huge increase in non-interest income of 50 % yoy and 19% qoq, higher qoq provisioning cover and declining C/I ratio were the key positives. However, lower margins (as expected), deferment of MTM provisions, low CET1 against strong loan growth, lumpiness in fees, higher proportion of borrowings in the funding mix were key negatives. There were some one-offs / non-recurring gains as well – 1) shifting gains of Rs1bn, 2) gains on redemption of security receipts of Rs700M 3) deferred MTM provisions of Rs2.8bn. The post-tax impact of the one-off gains in 1Q19 is Rs3.2bn against reported PAT of Rs12.6bn. Against this, trading gains in 1Q18 were Rs2bn pre-tax / Rs1.4bn post tax, versus reported PAT of Rs9.7bn in that quarter.
• Loan growth was strong at 53% yoy and 6% qoq. Large corporate loans grew 52% yoy and 5% qoq while retail banking grew 105% yoy and 21% qoq. Within large corporate banking, loans sanctioned by the international business unit (IBU) grew very sharply at 215% yoy and 32% qoq. While loans grew strongly, NIM declined 40 bps yoy and 10 bps qoq to 4.3%. With lower NIMs, NII growth of 23% and 3% qoq continued to lag loan growth of 53% yoy /6% qoq. Mgmt expects NIMs to improve 20-25bps as loans reprice under MCLR.
• Non-interest income grew 50% yoy and 19% qoq. Corporate fees and debt/forex/security fees grew strongly by 66% yoy/6% qoq and 43% yoy /158% qoq. Shifting gains and redemption of SRs are key one-offs.
• Asset quality remained stable. Slippage was Rs5.6bn against 3.8bn qoq. GNPAs grew 7.5% qoq to 1.31% of loans. Mgmt expects to recover 60% of 1Q slippages in 2Q.  Provisioning cover improved from 50% to 55% qoq. CET1 declined to 9.5% from 9.7% qoq. Excluding operational risks, which are factored in 1Q every year, RWA/total assets would have been lower at 80.2%

Valuation and view

We maintain our Neutral rating on two concerns 1) We would wait for RBI’s approval on the re-appointment of the current CEO. 2) We are concerned about the strong and higher-than-peers loan growth in the corporate segment amidst a downturn in the corporate cycle. Mgmt has guided to an increase of 25bps in NIM through FY19. We believe the increase will be lower given that cost of funds will rise and the proportion of lower yielding retail loans will also increase. Even so given the (low) base effect of 2H18, NII growth will move back to the 30% plus range in 2H19 against 23% in 1Q. We have increased our earnings by 3.7% for FY19 and 5.8% for FY20 to account for higher other income. Our TP rises to Rs350 from Rs340 earlier.