Yes Bank's Q2FY20 results (Underperformer) - Sharp deterioration in assetquality. Credit cost guidance doubles.

Q2FY20 result highlights

YES Bank reported a weak quarter with a sharp 42% increase in GNPAs to 7.4%,  gross addition of 18% to an already large BB book and 37% of slippage still outside the watch list. More importantly mgmt. has doubled credit cost guidance from 1.25% to 2.5%. PCR remains low at 43%. The bank has fully utilized the contingency provision made in 4Q19 with draw-down of Rs7bn in 2Q (14bn in 1Q)

Slippage remained elevated at 59bn versus 62bn qoq. Around 22bn of slippage came outside the watch list. GNPAs rose 42% qoq to 7.4%. GNPAs plus non-performing investments and SRs amount to 8.4% of loans. The gross addition to BB was Rs52bn / 18% of opening book. Closing BB grew 7% qoq to Rs314bn and remains uncomfortably high at 10% of loans. Mgmt believes that there will not be any further addition to BB. We note that the BB portfolio has risen sharply over the last few quarters (it has risen from 2.4% of loans in 2QFY19 to 10.1% in 2QFY20) and given the weak macro we believe it could rise further. Additionally even the BBB portfolio has risen sharply from 17% to 21% qoq. The additional stress came from accounts like CCD, Cox n Kings, Altico. Exposure to telecom is 2.5%. Of the total real estate exposure of 7%, one-third is already classified as stress, 10-15% is A rated while the remaining is in BBB category which is potentially risky and is being closely monitored. The bank has provided 25% on DHFL bonds. Mgmt doubled credit cost guidance to 2.5% given the slow pace of recoveries.

Core PPOP declined 38% yoy and 26% qoq. NIMs declined 10bps qoq to 2.7%. Loans remained flat yoy. While consumer loans grew strongly by 40% yoy and 11% qoq (the bank has been focussing on granular retail loans), corporate loans declined as part of the bank’s strategy to optimize capital. CASA deposits declined 6% qoq while term deposits declined 8%. We will continue to monitor deposit behaviour over the next few quarters. NII declined 10% yoy and 4% qoq. Non-int income declined 36% yoy / 26% qoq.  Credit cost ex-drawdowns was 2.2% while including draw-down of contingency provisions it was higher at 3.4%. PBT came in at a low Rs1.2bn down 91% yoy / 30% qoq. The bank adopted the new tax norms for which it incurred a DTA-remeasurement charge of 7bn. Due to this, the bank reported a loss of 6bn versus PAT of 1bn qoq and 9.6bn yoy.

Valuation and view

Our thesis that the bank’s stress pool and credit cost will continue to rise and remain higher than mgmt. guidance is playing out. We are increasing our GNPA forecasts and building in a loss for FY20E. We believe the capital infusion of UDS1.2bn (at Rs60 in our view) will mitigate concerns on sustainability. However most of the new capital will be consumed towards provisioning. We do not expect RoE to move beyond 5% by FY22. We retain our target multiple of 0.5x adj BV and TP of 35. Reiterate Underperformer.