YES Bank - Turnaround progressing well; asset quality pangs merely deferred - ICICI Securities

It becomes tricky to assess YES Bank, from a stock call perspective, especially during its consolidation/turnaround phase, post the reconstruction (and re-emergence) with solid backing from the country's most trusted bank, State Bank of India. Henceforth, it calls for evaluation and assessment quite differently and distinctly.

- Assessing the post reconstruction consolidation phase - progressing well: Post the reconstruction of the bank, operating metrics are progressing well for now: 1) Downsizing of asset base was arrested to a large extent (down more than a third against expectations of 50% contraction) and 2) endeavour to build capital buffer (CET-1 of 13.5% post capital raising of Rs150bn), liquidity buffer (average daily LCR at 100%) and steady deposit accretion (29% growth in H1FY21) reinstates some confidence. Also, steadily improving fee income and NIM profile is commendable.

However, we believe, the key overhang i.e asset quality pangs still remain far from over for the bank and have been merely deferred (due to moratorium/restructuring benefit). This is reflected in labelled stress exposure at 25% of advances (with 70% provision coverage), standstill advances at 1.5%, stage-2 assets at 4%, estimated cumulative slippage run-rate of >10% and cumulative credit cost of >5% over FY21E/FY22E.

- Assessing medium-to-long term evolution and market positioning: Fundamentally, we actually need to weigh its interim progress against the medium-to-long term franchise sustainability, stability and scalability. The granular deposit (retail TD, CASA etc) and loan profile (retail, MSME etc) that it aims to build in the medium term is an extremely competitive segment and will come with opex and at lower spread. It goes without saying that the revamped management team leadership of Mr. Prashant Kumar, leveraging on backing of leading shareholder banks, with changed governance and underwriting framework is stabilising and turning around the bank for better from its downcycle. However, it will evolve more like a 'me-too' bank with industry average business franchise and profile. It also becomes important to appraise its business positioning - market acceptability, stakeholders' confidence/trust especially as a standalone bank and how shareholding/structure will look 3-5 years down the line - limited visibility as of now.  Super-imposing this to valuation multiple for a stock call: Anticipated capital erosion risk at one go from unrecognised stress is scaled down and deferred. However, given the challenging environment and the existing stress pool, credit cost will offset operating profit in the interim (as witnessed in H1FY21), thereby, supressing earnings. Also, capital buffer and balance sheet consolidation will keep RoEs depressed (at least till FY23).

Super-imposing potential medium term return profile on valuation multiple of 1.1x FY22 adj book (that too on bloated equity just raised) suggests turnaround progress is fairly captured in valuations. We reinitiate with HOLD and target price of Rs14. Key risks to our call: 1) Better-than-anticipated evolution of business franchise post consolidation phase; 2) lower than anticipated asset quality pangs; and 3) lock-in of shares and lower float can boost stock value beyond fundamentals.

Shares of YES BANK LTD. was last trading in BSE at Rs.13.35 as compared to the previous close of Rs. 12.72. The total number of shares traded during the day was 39164400 in over 19449 trades.

The stock hit an intraday high of Rs. 13.35 and intraday low of 12.65. The net turnover during the day was Rs. 517106212.

Source : Equity Bulls

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