Yes Bank Ltd: Sell

CMP:  Rs.218.70

Targets: Rs.193/172

Photo: The Economic Times

I have given a sell call on the shares of Yes Bank Ltd which is trading at Rs.218.70. Though recently the Reserve Bank of India hadn’t found any deviation in its reporting of bad loans (FY18 NPA divergence issue) and the growth in net interest income (the difference between interest income and expenses) was a healthy 41.2% aided by advances growth of over 42% and stability in interest margin at 3.3%; I find that there are still some issues which needs to be addressed before taking fresh exposures at the current market price

Rationale: 

#Gross NPA for the Q3FY19 rose to 2.10% from 1.60% in September quarter and 1.72% in December quarter of last year. There was a significant deterioration in asset quality in the quarter under review, thanks to a large slippage on account of IL&FS. Of the total slippage of Rs.2,297 crore – around Rs.1,913 crore is believed to be on account of IL&FS.  Some brokerage houses expect a short but sharp slowdown in  its growth with corresponding weakness in income levels, as the bank tries to conserve capital. 

#Yes Bank's net profit also fell 7% to Rs.1,002 Cr in December 2018 quarter. Its Q3FY19 performance was marred by its significant exposure to the IL&FS group, as mentioned earlier. In the days to come, the direction of IL&FS resolution (that will determine the final hair cut for each lender) will be one of the key issues. The bank’s Senior Group President Rajat Monga recently said YES Bank is expecting a resolution of these accounts within THREE to SIX months since there is “sufficient and viable interest” for them. So, there is no immediate quick-fix for this nagging issue. 

#Net provisions for the December quarter rose to Rs.550.20 crore on account of Rs.570.80 crore of accelerated provisioning on exposure to a stressed Infrastructure conglomerate. Provisions and contingencies rose 30.6% to Rs 550.2 crore in the quarter, from Rs 421.3 crore a year ago. 

#Yes Bank needs capital, further lack of which could constrain its loan growth. Currently, its capital position is tight with CET 1 at 9.1%. The management plans to raise capital from the market which is not doing too well at the present moment; besides pursuing options to sell some of its non-core assets. These things naturally takes time. 

#During the quarter ended December 2018, the bank recorded a flat net interest margin on a q-o-q basis, and slower corporate growth. Meanwhile, the bond hedge losses were steep limiting its ability to conserve more capital. This situation may continue until capital is raised, which will be difficult, especially when the sentiment of the investors towards the banking stocks is currently negative. 

#Return on assets fell to 1.1% with continued growth in assets, while return on equity stood at 14.4%. “Placed in a situation where management will have to balance its loan growth aspirations with capital constraints, overall net loan growth would be muted for FY19,” noted brokerage Jefferies India in a report. In fact, it cut the bank’s FY19-21 estimates to 12-14% considering flat growth in NIM, lower fee income, and higher expense ratio but benign credit costs. 

#The incoming CEO & MD has to come with a robust strategy to tide over the bearish sentiment, control NPA divergences, and improve profitability. Unfortunately, this is expected to take at least 5-6 months. 

#Core fee income too was down 10.1%, though retail banking fee growth at 22% somewhat brightened up the bleak scenario. On account of subdued income, headline expense ratio stood at 44%, though as a percentage of average assets it improved to 1.68% versus 1.73% sequentially. Casa ratio too was down to 33.3% against 33.8% the previous quarter. 

Moreover, according to a report published on The Economic Times on January 21, the IL&FS has a total debt of Rs.91,000 crore. Of this, about Rs.50,000 crore is owed to the banks. According to UBS estimates, YES Bank, Bank of Baroda, Punjab National Bank and IndusInd have relatively high exposure to the group. 

Against this backdrop and lot of other issues concerning the banking sector, I find this is not an appropriate time to pick up this stock, specially when bank is passing through a transition stage, as Ravneet Singh Gill, the new MD and CEO and once next door neighbour of Dr.Raghuram Rajan, the former RBI governor, takes over the reins from Rana Kapoor on 1 March; whose term ended on January 31.

Besides, while loan recoveries are picking up, caution should be exercised on fresh slippages, which was largely driven by IL&FS exposure during the third quarter. On the positive side what is less stressful to investors though, is that the bank’s exposure to NBFCs isn’t a reason for worry with over 96% rated AAA and above. 

Sell the scrip of Yes Bank Ltd in the F&On segment, corresponding the spot price of Rs.218.70, for short term targets of Rs.193/172. Please keep a SL at Rs.223.