Hold YES Bank, target Rs 225: Sharekhan

Hold YES Bank, target Rs 225: Sharekhan

Sharekhan has a hold call on YES Bank with a target price of Rs 225.

The current market price of YES Bank is Rs 189.50.

Time period given by the brokerage is one year when YES Bank price can reach the defined target.

View of the brokerage on YES Bank:

Operating performance below expectations: YES Bank has posted mixed set of numbers on the operating front with the net interest income rising by 28.2 per cent YoY to Rs 2417 crore while the non-interest income increased by 18.0 per cent YoY to Rs1473 crore. Fee income growth stood at 17.5 per cent YoY which was driven by retail banking fee growth of 32.9 per cent YoY. Net interest margin for the quarter remained stable at 3.3 per cent on a sequential basis. Provisions for the quarter jumped by 110 per cent YoY to Rs940 crore which includes onetime MTM provisioning of Rs 252 crore on corporate bonds and Rs92 crore of amortization of MTM losses as allowed by RBI to spread across four quarters. Impacted by high provisioning the net profit for the quarter declined by 3.8 per cent YoY to Rs 964 crore.

Outlook: YES Bank has posted mixed results for the quarter with impressive growth on one hand and weakening of asset quality on the other. Also, exposures to certain segments may keep asset quality outlook dicey. MTM losses worth Rs186.8 crore will be amortized as per RBI dispensation. The bank also plans to raise PCR levels which effectively could impact near-term bottom line, though balance sheet strengthening will be positive. Going forward, the pending succession issue will likely impede capital raising plans, and thus result in growth challenges in the near term.

Valuation: The Bank currently trades at 1.3x FY20E Book value which reflects the concerns over multiple challenges that the bank is facing. We thus maintain our Hold rating on the stock with revised PT of 225.

Robust loan growth: YES Bank witnessed robust loan momentum during the quarter as its loan portfolio surged by 61.2 per cent y-o-y on the back of strong 63 per cent y-o-y rise in the corporate segment while retail & business banking book jumped by 57 per cent y-o-y. Within the Retail & Business Banking group, SME book grew by 31.2 per cent y-o-y Medium Enterprise portfolio increased by 34 per cent y-o-y while the retail (consumer banking) book jumped by 103 per cent y-o-y. Deposit growth for the quarter stood at 41.0 per cent y-o-y in which CASA deposit grew by 28.2 per cent y-o-y . As a result, CASA ratio declined by 339 BPS y-o-y and 133 BPS q-o-q to 33.8 per cent. CASA and Retail Fixed Deposits formed 57.2 per cent of overall deposits as against 56.7 per cent in the previous quarter.

Asset quality deteriorates: During Q2FY19, YES Bank witnessed a deterioration in its asset quality as GNPA ratio jumped by 29 BPS on a sequential basis to 1.60 per cent while net NPA increased to 0.84 per cent (up 25 BPS q-o-q. Slippages for the quarter increased to Rs 1,632 crore as compared to Rs 560 crore in the previous quarter. Of the total slippages Rs 631 crore has been on account of recognition in the post period review process (bank expects prepayments and upgrade of the account by Q3FY19) but even net of that, the slippage run-rate has spiked which is a cause of concern. Accounts worth Rs 450 crore was sold to ARC during the quarter (realised value Rs 340 crores, cash received Rs 51 crores). YES Bank has a minuscule exposure of 0.01 per cent and 0.27 per cent of Gross advances towards NCLT list 1 and List 2 respectively. SMA2 outstanding exposure is to the tune of 0.15 per cent of the advances and its stressed pool is at 1.77 per cent of the book. The Bank has exposure of Rs2620 crore to the beleaguered Infrastructure finance conglomerate company (mostly on SPV levels) which is still standard in Bank’s books and hence is an overhang. Also, The Bank is yet to receive the FY18 Risk Based Supervision report from the RBI. Management has revised FY2019E credit cost guidance to 80BPS.