Neutral on YES Bank FPO - Angel Broking

Yes Bank Ltd. (YBL), a new generation private sector bank, was incorporated in November 2003 by Mr. Rana Kapoor and Mr. Ashok Kapur. However, the RBI superseded the Board of Directors of the bank and imposed a moratorium on YBL from March 05, 2020. Further, on March 13, 2020, the government had approved a bailout plan for Yes Bank. Under the plan, Yes Bank had received around Rs. 10,000cr from eight financial institutions, including Rs. 6,050cr from SBI. Currently, pre-FPO, SBI owns 48.21% in Yes Bank.

Weakening operations, business metrics; SBI support to take longer time for stabilizing: Yes Bank was having deposits worth Rs. 2,27,610cr as on Q4FY2019, however, it dropped to Rs. 2,09,497cr in Q2FY20. Further, as a result of the negative news in Q3 & Q4 of FY2020, the bank witnessed sizeable deposit withdrawal of Rs. 1,00,000cr reaching to Rs. 1,05,364cr in Q4FY2020. CASA deposits declined 63% yoy to Rs. 28,063cr. We believe rebuilding term deposit and CASA would be a challenging task, nevertheless SBI image would likely help YBL to stop further depletion in deposit base. Moreover, constraint in capital and deposit withdrawal has impacted loan book too, which declined 29% yoy in FY20; consequently, adversely impacting NII and other income. Subsequently preprovision profit plunged 56% in FY20.

Improvement in asset quality a far off thing; economic slowdown to add to existing woes: GNPA for FY2020 spiked 4.2x to Rs. 32,878cr, which led to 6x increase on provision on bad asset. This impacted profitability adversely, and YBL reported loss of Rs. 16,418cr. However, on positive side, YBL's provision coverage ratio increased to 74%. We believe the bank's provision cost to remain elevated owing to (1) high overdue advances (SMA I & II) that stood at 6.5% (Rs. 11,102cr) of the standard advances as on Q4FY20, (2) Covid led slowdown in economic activity to impact bank's exposure to segments like real estate, hospitality, travel and tourism.

Gap between FPO price & CMP: We believe current market price of Yes Bank is not the true reflection of fundamentals given that the reconstruction scheme had locked in 75% of all shares for 3 years, held by existing shareholders and new investors entering via the scheme. Hence, we believe CMP will converge around FPO price, once FPO shares float in the market. However, on FPO there is no locked in period for any investor.

Market outlook and valuation: At the upper end of the price band, Yes Bank demands Adj. PB of 0.85x post considering FPO. In current market, other banks are trading at attractive valuation of FY20 net worth viz. IDFC Bank (0.9x), SBI Bank (0.5x Core banking business), Federal Bank (0.9x). Our concern for Yes Bank is fresh formation of bad loans that would keep provision highs and return ratio compressed for longer time. Retail deposit is the key for any bank for lower cost of funds; however, YBL has witnessed sizable deposit withdrawal over last 2 quarters. Rebuilding CASA and deposits is a challenging task and would take longer time. Overall, the bank's revival and decent RoE numbers will take longer time. Considering above factors, we recommend NEUTRAL rating for FPO.

Shares of YES BANK LTD. was last trading in BSE at Rs.20.95 as compared to the previous close of Rs. 22.1. The total number of shares traded during the day was 5699770 in over 23340 trades.

The stock hit an intraday high of Rs. 21.75 and intraday low of 20.25. The net turnover during the day was Rs. 118975393.

Source : Equity Bulls

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