Yes Bank's Q3FY19 results (Underperformer) - Better than expected, but divergence awaited

Q3FY19 results

• Amidst fears of a weak quarter, YES Bank reported better than expected PAT of Rs10bn. PAT declined 7% yoy but grew 4% qoq.  Operating performance was mixed. Stable NIM and strong loan growth were key positives while a sequential decline in savings and a sharp decline in non-interest income were negatives. There was a treasury loss of Rs2.8bn which was partly offset by MTM write back of Rs2.06bn.
• Slippage ex IL&FS was low at Rs3.8bn versus Rs16.3bn qoq. Including IL&FS (Rs19bn of the total exposure of Rs25bn slipped), slippage was much higher at Rs23bn. The bank is yet to receive its final divergence report from RBI which remains a key risk. Recovery+upgrade during the quarter was also high with total reduction to NPLs rising to Rs10bn from Rs6bn qoq. GNPAs rose 33% qoq and 73% YTD to 2.1%. PCR ex ILFS is 56% and with ILFS it is 44%.
• Loan growth remained strong at 42% yoy and 2% qoq. Retail banking grew sharply at 82% yoy and 8% qoq driven by auto loans. There was a sharp deceleration in savings deposits that grew 4% yoy (26% in 2Q) and declined 10% qoq. Excluding government deposits, savings growth was still flat qoq and up 20% yoy. Current accounts grew strongly at 31% yoy and 14% qoq. With the strong growth in volatile current balances, overall CASA decline was contained at 1.5% qoq (growth of 13.5% yoy) despite deceleration in savings. CASA ratio declined 50 bps qoq to 33.3%.
• NIM remained stable qoq against expectation of a decline possibly due to a sharp increase in current accounts which tend to be volatile and full impact of the sharp loan growth in 2Q, the full impact of which was seen in 3Q.
• Non-interest declined 37% yoy and 40% qoq. The bank booked loss on sale of investments. Even excluding the volatile line item of forex, +debt+capital markets, other income remains subdued declining 11% yoy and 16% qoq due to a sharp decline in corporate fees.

Valuation and view

We reiterate our Underperformer on YES as we see the forthcoming divergence report and low capital as big risks. YES Bank has appointed Ravneet Gill, ex CEO of Deutsche Bank India, as its new CEO. However, even with a reputed new CEO, loan book clean up and consequent earnings recovery will be long-drawn. We believe the new CEO will have to focus on cleaning up divergence which could result in high credit cost and slower loan and fee growth. Also, revival in savings deposits is a key monitorable because funding CASA through current accounts may not be possible every quarter.  Till there is visibility on earnings and business strategy raising capital will be difficult. We cut earnings and marginally cut TP to Rs170. We highlight downside risks to earnings if divergence is higher than earlier indications of Rs15-20bn.