Event update: Yes bank (Underperformer) - RBI takes a serious step, negative for YES

RBI has appointed a director on the Board of YES Bank. Mr R Gandhi, ex deputy governor of RBI, has been nominated by RBI as an additional director under Sec 36 AB (1). This section reads as follows: “If the Reserve Bank is of the opinion that in the interest of banking policy or in the public interest or in the interests of the banking company or its depositors it is necessary so to do, it may from time to time, by order in writing, appoint, with effect from such date as may be specified in the order, one or more persons to hold office as additional directors of the bank­ing company.

We see RBI appointing an additional director as a serious matter and negative for the bank.  Usually additional directors are appointed in weak banks to safeguard the interest of the depositors. RBI has appointed additional directors earlier in Lakshmi Vilas Bank, J&K Bank, Bank of Rajasthan, State Bank of Bikaner and Jaipur. But it may be noted that none of these banks were/are systematically large banks. YES Bank is the first systematically large bank where an additional director has been appointed under this section.

It is important to note that the financial sector is going through a rough patch with rapid downgrades of NBFC ratings. RBI would be aware that appointing an additional director on the Board of a large bank could add to nervousness. Yet, this step has been taken probably to safeguard depositor interest. RBI taking this step in the current sensitive environment itself makes the matter very serious.

We believe this step will impact YES Bank’s near term capital raising plans and could also impact the inflow of the much needed retail deposits that the bank was targeting to make its business granular. With a low CET1 of 8.4% and a large stress list we believe valuations will take a further knock.

Based on open charges on the MCA, we believe YES Bank’s exposure to groups or companies that have seen recent rating downgrades is Rs400-450bn, while the bank has put out a stress list of Rs100bn. We believe YES Bank’s credit cost will be substantially higher than management’s estimate of 1.25% for FY20E given the slow pace of asset monetization across corporate groups.

We believe YES needs to raise capital as soon as possible to meet higher credit costs in FY20/21 and pursue mgmt’s loan growth target of 17-20%. With today’s move by RBI, investors are likely to wait and watch the progress made by the bank in the presence of the new director which would delay the bank’s crucial capital raise.  We are cutting our target multiple to 0.9x from 1.1x FY21 PBV. Our new TP is Rs135. At our target price, the stock trades at 1.2x adjusted book for FY21E (including capital issuance). We reiterate Underperformer / Top Sell.