Yes Bank's Q1FY20 results (Underperformer) - Weak on all fronts, capital ofUS1bn will not be sufficient

Q1FY20 result highlights

• YES Bank’s PAT of Rs1bn declined 91% yoy.The bank had posted a loss of Rs15bn in 4Q. Excluding gains on sale of HTM of Rs4.5bn, the bank would have booked a pre-tax loss of Rs2.8bn against the reported PBT of 1.8bn. In 1Q, the bank drew down Rs14bn of provisions from the buffer of 21bn created in 4Q.
• There was weakness in every operating parameter:  1) Slippage rose sharply to Rs62bn versus Rs35bn qoq. 2) NIM declined sharply by 30 bps qoq to 2.8% 3) Loan growth declined to 10% yoy from 19% in 4Q  4) CASA declined 320bps qoq to 30.1% 5) Core fees remained weak declining 51% yoy 6) Capital consumption shot up during the quarter as the bank had to provide 150% on unrated exposures and there were bond rating downgrades of two NBFCs. CET-1 declined sharply by 40bps to 8% and is now at the regulatory requirement,  indicating that the bank needs to raise capital immediately to able to grow and make higher provisions.
• Slippage of Rs62bn was uncomfortably high at 11.6% of lagged loans and much higher than Rs35bn in 4Q19. Excluding inter-quarter slippage, net slippage was Rs45bn of which Rs1bn was retail. GNPAs rose sharply to 5.01% from 3.22% qoq. The reported credit cost is 32 bps (128bps annualized). However, that does not include MTM on DHFL and RCap bonds. Including that, the credit cost is 2.5x the reported number at 75bps non-annualized and 3% annualized. If we add draw-down of 14bn from the provisioning buffer created last quarter, credit cost rises to 5% annualized. Management has guided to 1.25% credit cost for FY20 while the 1Q run-rate including MTM is already higher.
• The gross BB book rose sharply by 100bn from Rs230bn to Rs330bn. After excluding net corporate slippage of 44bn, the size of the BB book stands at 295bn or 9.4% of the corporate book. The increase in the BB book came from two NBFCs (RCap and DHFL) whose bonds were downgraded. We had highlighted that the size of the BB / stress pool would rise sharply. Even after the sharp rise in 1Q, we expect further increase in the quarters ahead. We believe new accounts other than those belonging to the DHFL/ADAG/Essel groups that have been recently downgraded will be added to the BB pool in the coming quarters. In addition, we believe that the entire exposures to the stress groups such as ADAG are not yet part of BB. The residual exposures to these groups will likely get added to the stress pool. We calculate the total stress pool to be Rs480-500bn.

Valuation and view

Given sharp deterioration in all key metrics, capital at the brink, low provisioning cover and a rising stress pool, we reiterate underperform. As we expect further increase to the BB portfolio and higher slippages, we slash our earnings, and TP to Rs82. After assuming capital infusion of USD850M at Rs98 per share in FY20 and USD500M at Rs130 per share in FY21, our RoE remains in single digits through our forecast period and CET-1 remains below 9%.