YES Bank profit up 74% but analysts recommend ‘sell’ on the stock. Here’s why


YES Bank

‘s 74 per cent surge in September quarter profit failed to allay analysts’ concerns, especially the ones relating to non-performing assets, restructurings and sub-par return ratios. Analysts said asset concerns are unlikely to resolve in the short-term and found risk-reward unfavourable, keeping their ‘sell’ ratings intact on the stock.

There are some initial signs of recovery but uncertainty around corporate book stress build-up, selling restrictions on private banks and an uncertain operating environment preclude any meaningful assessment of business direction and residual net worth valuation, said Edelweiss Securities.

Nirmal Bang Institutional Equities said: “Investment case remains unconvincing” while Emkay Global said “the risk-reward ratio stays unfavourable.”

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“We expect the bank’s RoA trajectory to remain sub-par at 0.5-0.8 per cent over FY23-24 compared with the management expectation of 1-1.5 per cent. We retain ‘sell’ with a target of Rs 10. Although the current management with regulatory and investor support has been able to avert bank failure, we believe that reorienting YES Bank to a sustainable retail bank will be a tall task,” Emkay said.

Analysts corroborated the view of former SBI chairman Rajnish Kumar, who recently said that the bank may take two more years to stabilise.

The private lender reported a 74.3 per cent YoY growth in net profit to Rs 225 crore for the quarter ended September quarter, even as its net interest income (NII) fell 23.4 per cent YoY to Rs 1,512 crore.

What boosted the bottom line was a sharp decline in provisions. YES Bank’s provisions for bad loans declined 65 per cent year-on-year to Rs 377 crore but at the same time the restructured pool has expanded to Rs 6,100 crore, accounting for 3.6 per cent of loans compared with 3 per cent in June quarter.

Fresh slippages remained high at Rs 1,700 crore, 4.3 per cent of loans. This was mainly on account of corporates (Rs 750 crore), including Future Retail and few real estate corporates.

Retail slippages were also high at Rs 890 crore. Gross NPA ratio improved 63 bps sequentially to 15 per cent due to upgrades of Rs 970 crore led by restructuring, recovery of Rs 300 crore and write-offs of Rs 270 crore.

For H1FY22, total recoveries stood at Rs 3,260 crore, with the bank expecting improvement in asset quality as recoveries materialise over the coming quarters. The management was confident of exceeding its own target of Rs 5,000 crore in recoveries in FY22.

“Deposit accretion is tracking well with overall deposits showing healthy growth despite cutting down on rates. Credit growth seems to be normalising as the bank realigns its portfolio mix towards retail and MSME. Though slippages have been coming down, likely pointing towards subsiding asset quality pressure, we remain wary of the elevated NPAs which we believe will take time to reduce to a comfortable level,” Nirmal Bang said.

This brokerage has a sell rating on the stock with a target of Rs 12.5, based on 0.9 time H1FY24 adjusted book value.

“While some green shoots are visible, meaningful recovery will require strenuous effort, consistency and some macro tailwind. There is still a long way to go. Though capital raising is past, deposit accretion and asset quality are the key elements to monitor, not to mention stakeholder confidence. Evolution’s focus over the next two–three years is very much an open question; that, in our opinion, lies more in the realm of speculation than analysis,” Edelweiss said while keeping the stock ‘under review’.

Under the scanner: RBI to check if Yes Bank auditor BSR had raised red flags

MUMBAI: The Reserve Bank of India will check whether Yes Bank’s statutory auditor had raised any red flags in the past year, two people aware of the development told ET. The banking regulator last week proposed a rescue of the private-sector lender that will be led by State Bank of India (SBI).

The RBI has been in touch with auditor BSR & Co., which is a part of KPMG India, over the past few months. But the central bank will now specifically look at whether the auditor had issued any warnings over the past 12 months. Officials aware of the central bank’s plans told ET that RBI officials had already held meetings with Yes Bank’s new audit committee.

“The RBI wants to know whether the auditor had specified anything related to the bank’s health or other issues as a going concern or raised any other red flags over the past year,” said a person with direct knowledge of the matter.

The central bank will also likely question the auditor on the health of the bank and whether the SBI proposal will have ‘any material impact’ on the private sector lender’s existing accounts, said one of the persons.

The RBI could also look into the impact of the reconstruction scheme on Yes Bank’s financial statements, the person further added.

Bad Loans Under-reported
The central bank didn’t respond to ET’s emailed queries. A BSR spokesperson said, “As a policy, we cannot comment on any client- or company-specific matters.”

The financial markets were shut in Mumbai on Tuesday due to the Holi festival.

“The liquidity position of the bank and several other issues would now be asked not just by the RBI, but also by the incoming investors,” said the second person.

Last week, RBI superseded the Yes Bank board and announced a reconstruction plan that will entail an investment of up to 49% by SBI.

The central bank’s move had been based on the enforcement action framework drawn up by it in June 2018. The framework listed audit lapses resulting in errors in a bank’s financial statement, wrong certifications and information given by auditors, misconduct of auditors and any other violations of RBI directions as grounds to penalise auditors.

The RBI’s audit revealed that Yes Bank had under-reported bad loans by Rs 3,226 crore and provisions by Rs 978 crore in FY19. It first noted a pergence for FY16 to the tune of Rs 4,176 crore and then of Rs 6,355 crore in the FY17 accounts.