Yes Bank's Q2FY19 results (Underperformer) - Miss even without the divergence report

Q2FY19 results

• YES Bank’s PAT of Rs9.6bn declined by 4% yoy and 23% qoq. PAT was substantially lower than the consensus estimate of Rs12bn, pulled down by fresh MTM loss of Rs2.52bn on corporate bonds because of higher yields and higher spreads. Provisioning cover dropped to 48% because of an unexpected large slippage of one account of Rs6.3bn. The bank is yet to receive the final divergence report from RBI.
• YES Bank had already announced key balance sheet numbers and tentative NPL numbers on Oct 1. While balance sheet numbers were in line with the earlier disclosure, NPLs were higher (by 33% including ARC sale) because of slippage of one account of Rs6.3bn that came up in the post quarter review.
• Slippage of Rs16.3bn was higher than Rs5.6bn qoq while the bank sold one account of Rs4.4bn to an ARC. Slippage was higher than expected due to the slippage of one account of Rs6.3bn belonging to a diversified group. A liquidity event in that group is at an advanced stage of closure which will lead to the upgrade of the account that slipped. GNPAs rose sharply by 37% qoq to 1.6% of loans but remain much lower than other corporate banks. The bank has exposure of Rs26bn to IL&FS which is all asset-backed and is in SPVs. As such the bank did not see the need to make provisions on this in 2Q.
• Loan growth was strong at 61% yoy and 12% qoq. Large corporate loans grew 63% yoy and 13% qoq while retail banking grew 57% yoy and 10% qoq. CASA ratio declined to 33.8% from 35% qoq. NIM remained stable qoq at 3.3% against a decline for most other banks. NII grew strongly at 28% yoy and 9% qoq.
• Non-interest income grew 18% yoy but declined 13% qoq. Adjusting for one-off bond gains, core non-interest income grew 39%. Due to strong loan growth, capital consumption was high at 50bps qoq.

Valuation and view

We reiterate our Underperformer rating as we see the forthcoming divergence report, low capital and succession as key risks. YES Bank has reached a dead-end in its loan growth versus capitalisation equation. Due to aggressive loan growth (loan book has grown 81% since the last equity issue in Mar-2017), CET1 has fallen to 9% which means that the bank will either have to raise fresh capital soon or loan growth and profitability will slow down. Raising capital in the current management transition phase will be difficult. YES is the only corporate bank that has come out unscathed in the current corporate downturn. If we were to benchmark NPLs of YES to the average of ICICI’s and AXIS Bank’s i.e. 7% of loans and make a post –tax provision of 70%, our BVPS for FY20E will be lower by 19% (current BVPS will be lower by 28%). An increase in credit cost to 100bps and a 10bps decline in NII/assets and fees/assets can take the sustainable RoE down to below 13% from 16.6%. We cut TP to Rs175 based on 1.2x PBV FY20E from 1.5x earlier.