Event update: Yes Bank (Underperformer) - Zero divergence by RBI for FY18 but large corporate exposures remain a concern

YES Bank received its divergence report from RBI for FY18. The divergence is zero. Mgmt had guided to Rs12bn -20bn of divergence while we and the street were expecting a much higher number going by asset quality of other corporate private banks. Mgmt has reiterated on earnings calls that irrespective of the divergence report their credit cost for FY19 will not exceed 80bps.

We note that this is the best divergence report in the sector for FY18 because none of the corporate banks we cover that have received divergence have said that their divergence is nil, though their divergence has not been material enough to be disclosed. While AXIS has not received its final divergence report, they too have reported that they did provisioning on a few accounts mentioned in the indicative divergence report.

YES Bank continues to have large exposures (based on MCA data) to stress groups such as ADAG, Essel group, DHFL and to sensitive sectors like real estate. As such we do believe that its asset quality would have to catch up with the rest of the corporate banking sector –corporate banks have NPLs ranging from 6% -16% versus YES Bank’s 2.1%. 

We believe YES Bank will be in a position to provide for additional stress after it raises capital. With zero divergence from RBI, YES Bank can now raise the much needed capital which can go among other things towards strengthening provisioning on disclosed and potential stress.

Valuation and conclusion

What the RBI’s zero divergence does is that it makes capital raise easy for YES Bank. Once the capital comes in the bank can look to provide more for corporate stress. We maintain Underperformer as we continue to believe that asset quality will have to catch up with the rest of the sector because the corporate cycle has been harsh over the last few years and it would be difficult for a single bank to remain unscathed when every other corporate bank has seen NPLs rise to above 5%. On the next page we have highlighted excerpts from the 2Q earnings call where management indicated that the bank would have divergence for FY18 and divergence will become nil only in FY19. So nil divergence is even better than what the bank had expected.