Yes Bank's Q4FY19 results (Underperformer) - Worst quarter, painful transition ahead

Q4FY19 results

• YES Bank reported its first ever loss of Rs15bn against the consensus estimate of PAT of Rs10bn. A big contingency provision of Rs21bn, slower loan and CASA growth, reversal of corporate fees and a huge increase in NPLs despite nil divergence are the key highlights.
• In Feb, RBI gave YES a zero divergence report for FY18 raising hopes that YES is safe from the corporate downturn unlike other corporate banks. However, in 4Q GNPAs rose 20% qoq (200% yoy) and slippages rose to Rs35bn (6.8% of lagged loans) from Rs23 bn (5.5% of lagged loans). GNPAs now stand at 3.2% of loans. Total stress loans have shot up to 8% of loans from 3% qoq after including the new stress pool of Rs100bn.
• The bank has identified stress loans of Rs100bn which could potentially slip to NPLs. These loans belong to the infra, entertainment and CRE sectors and include loans against shares. The stress pool comprises 6-7 assets which we believe belong to the Essel, ADAG and Omkar groups. The pool does not include NBFCs. Reliance Capital is not part of it while in our view Reliance Infra is. The bank has made a contingency provision of Rs21bn towards this pool.
• Loans grew 19% yoy in 4Q, much slower than 42% in 3Q. CASA decelerated to 3% yoy and 1.5% qoq while growth in term deposits was strong at 19% yoy and 3% qoq. Total deposits grew 13% yoy. CD ratio remained elevated at 106% versus 109% qoq. NIM declined 10bp qoq to 3.1%.  NII grew 16% yoy but declined 6% qoq.
• Non-interest income declined 63% yoy and 40% qoq. Corporate banking fees were negative as the bank reversed corporate fees, partly due to the large exposure framework kicking in, while retail banking fees grew 17% yoy. Opex grew 19% yoy and 9% qoq. PPOP declined 38% yoy and 34% qoq.

Valuation and view

YES has been our top sell because we believed that the corporate cycle was too harsh for a single corporate bank to remain unscathed when all other banks saw huge accumulation of bad loans – data available on MCA supported that view. We continue to reiterate our Underperform. After NIL divergence that raised hopes that YES Bank’s asset quality is clean, YES Bank’s disclosure of a watch list of Rs100bn is a big negative. We see more additions to the stress pool from promoter entities and real estate. The bank’s own guidance is that RoA will touch 1% only after 2 years. Shortage of capital (CET 1 is low at 8.4%) accentuates balance sheet risks. We see a prolonged transition period like we saw in other corporate banks during which profitability will remain subdued. We have revised earnings and cut TP to Rs155 (1.1x PB FY21).  YES Bank’s weak results came on a day that saw downgrades of big corporate groups – ADAG and Lodha – which is an added negative for future asset quality. We have factored dilution of 10% in FY20 and 5% each in FY21/FY22. New CEO inspires confidence but that does not spare the bank from a painful transition period.