Company update: Yes Bank (Underperformer) - Cut TP to 35 on more bad loans, higher dilution and stake sale overhang

We cut our TP on YES Bank to Rs35 (from Rs75) as we see more bad loans, higher haircuts due to slower resolutions and uncertainty around equity raising given the sharp correction in stock price. Rising NPLs and weak financials will also impact its ability to raise/retain deposits especially post PMC which could lead to a sharp pressure on NIMs. Wrong reports on stake sales /capital raise have already dented credibility as explained on the following page.

Top three stress loan exposures are 85% of net worth and 2x the existing base of GNPAs: The bad loan count of YES continues to rise with rising corporate stress. In our last report we had estimated the bank’s standard stress at Rs450bn. That has now risen to close to Rs500bn based on YES Bank’s exposures to loans downgraded recently. Our total standard stress loan estimate of Rs500bn is now 1.7x the bank’s net worth of Rs285bn. Of the total standard stress, the three accounts that investors are most concerned about ADAG, Essel group and DHFL add up to Rs242bn, which is 85% of the bank’s net worth and 2x its existing GNPAs of 121bn. With such concentrated stress exposures and slow resolutions, we expect a sharper increase in GNPAs compared to earlier estimates. We expect GNPAs of 9% / 9.6% in FY20/21 versus 5% in 1Q20.

Stock price fall will make further capital raise dilutive: We had assumed capital raise of US$500M in FY20/21 at Rs85/100. We change our stock price assumption to Rs55 which would lead to a higher than earlier expected dilution. We see further stake sale by promoter Rana Kapoor to repay RNAM’s loan as an overhang as explained on the following page.

Deposit taking ability would likely be impacted: Weak financials and overhang of NPLs could make it tough for YES Bank to raise further deposits and borrowings. This would constrain future growth and NIMs.

RBI oversight will likely increase after PMC: After the NBFC crisis and the under-reporting of bad loans by Punjab and Maharashtra Co-operative Bank (PMC) that came to the fore last week, we expect RBI to get stricter with banks such as YES that have concentrated stress loan exposures.

We sharply cut our earnings on higher credit cost, higher dilution and lower margins. Our new TP of Rs35 is based on 0.37x unadjusted BV for FY21. We reiterate Underperformer. We expect CET1 to drop below the required 8% by end year. We estimate that to maintain CET1 of just 1% above regulatory norm, YES requires capital as much as its current market cap. Given the huge capital shortage, we believe merger with a large state owned bank is the only way out.