MOSL: YES BANK (Buy)-Earnings impacted by higher provisions-multiple challenges ahead

YES BANK: Earnings impacted by higher provisions; multiple challenges ahead

(YES IN, Mkt Cap USD6.5b, CMP INR198, TP INR270, 36% Upside, Buy)

• A disappointing quarter, asset quality worries resurface: 2QFY19 PAT declined 4% YoY to INR9.6b on account of elevated provisions/MTM losses. PPoP increased 24% YoY to INR23.7b (4% miss). Based on 1HFY19 PAT of INR22.3b, we estimate YES to deliver 2HFY19 PAT of INR24.0b – implying residual growth of 6.5%.
• NII grew 28% YoY, led by strong loan growth (61% YoY) and stable margins of 3.3%. YES has INR1.8b of unamortized MTM losses to be recognized in FY19.
• Loan growth robust; CASA mix declines to 33.8%: Business momentum remained strong, with loan growth of 61% YoY (to INR2.39t) and deposits growth of 41% YoY (to INR2.23t). CASA deposits grew 28% YoY, but the CASA ratio declined to 33.8% (v/s 35.1% in 1Q) on account of a fall in the CA mix.
• Asset quality deteriorates, coverage ratio declines; guidance unchanged: Fresh slippages increased to INR16.3b (INR6.3b is expected to be recovered by 3Q), driving a 37% QoQ increase in absolute GNPLs (1.6% as on 2QFY19). Net NPL increased 60% QoQ to INR20.2b, while PCR declined 750bp QoQ to 47.8% (YES maintained its guidance to reach 60% PCR by end-FY19). NSL increased to ~1.8% of advances (~1.5% in 1QFY19). YES has INR26.2b exposure toward ILFS Group, which remains standard (toward asset-rich subsidiaries/SPVs). O/s SMA-2 exposure stands at 0.15% of gross advances.
• Other highlights: (i) CET-1 ratio declined to 9% (-50bp QoQ), even as overall Tier-1 stood at 11.9%. (ii) Bank will attempt to preserve capital by down-selling the past business and lowering the amount of new loans.