The entire concern revolves around BB and below book, which is now at | 29470 crore and the earlier watch list of Rs 10000 crore is a subset (from which | 2500 crore slipped this Q1). We conservatively factor in higher credit cost in FY20E (212 bps) and FY21E (176 bps), lower growth of 10% in credit and pressure on deposit growth. We revise our PAT growth lower by 52% for both FY20E and FY21E. Hence, RoA and RoE may decline to 0.5% and 6.6%, respectively. We factor in capital raising of ~| 5000 crore. With revised earnings and GNPA ratios, our ABV estimates dip in FY21E to | 95. We revise our rating further lower to REDUCE from HOLD as the stock may witness huge dilution for future capital to keep funding stress recognition and growth. Hence, we lower our target multiple to~0.8x FY21E ABV. Therefore, we downgrade our target price to Rs 75. Raising capital is utmost priority in the coming two months as CET1 has already reached 8%.
On our deep dive we believe only certain part of exposure can be resolved quickly, while large part of exposure slipping into NPAs remains a high chance which we have factored in the same over FY20 & FY21. Although we take comfort from imminent capital raise (we build-in Rs30bn in near term) & operating profit would help mitigate large provisioning requirement and should not see capital deterioration. We upgrade to HOLD (from REDUCE) with revised TP of Rs101 (from Rs190) based on 1.0x (from 1.5x) Mar-21 ABV.
We have revised our NII estimates by -0.8%/-2.2%, PPOP estimates by -5.5%/-0.8% and PAT estimates by -9.6%/-0.8% for FY20/FY21, respectively, and retained Buy rating on YBL, revising our target price to Rs113 (from Rs111 earlier) and valuing the stock at 0.8x FY21E P/BV.
What’s Not To Like Now? We recently met Mr. Ravneet Gill, CEO of Yes Bank (YBL) and gleaned incremental insight into the strategy of the company. We share our detailed takeaways below. We revise our estimates for FY20/FY21 and maintain Buy rating, revising our target price to Rs197 (from Rs273 earlier), valuing the stock at 1.3x FY21E (or 1.5x FY20E) P/BV. YBL is one of our top picks in the banking sector.
Yes Bank’s result for Q4FY19 under the leadership of new CEO was a reflection of management’s shift towards conservative approach and re-building the credibility of the bank. It has reported a loss of Rs 1507 cr, largely due to higher provisioning made during the quarter. The bank has made contingent provision of Rs 2100 cr towards a loan book of Rs ~10000 cr (BB & below rated) which was identified as stressed. These assets come under the corporate segment and include 5-6 accounts from real estate, infra and media & telecom sector. We downgrade our rating to ‘Hold’ from ‘Accumulate’ with a revised target price of Rs 187.
Valuation: Yes Bank currently trades at ~1.6x its FY21E book value, which we believe is reasonable. However, we believe the near term upsides may be limited as the bank’s changed strategy, business mix, and conservatism may entail into slower growth and moderate return ratios, albeit with a better quality of incremental business for the next year. We therefore maintain our Buy rating on the stock with a revised PT of Rs. 275.
Valuation & Outlook: As expected, the change in leadership has led to a balance sheet clean-up (popularly termed kitchen sinking). Hence, an impact on earnings in the near term is imminent. The stress book of | 10000 crore is significantly higher than expected with upside risks. Therefore, in spite of conservatively factoring in higher credit cost in FY20E, a sharp rise in FY19 credit cost at ~209 bps and guidance of further credit provision in future has pushed RoA of 1% to two years ahead. Further slippages in BB and below rated pool remains a key concern, going ahead. In addition, capital raising is expected to further dilute RoE (FY19 at 6.5%) and expect FY21E RoE at 12%. Factoring in concerns on asset quality does impact our ABV estimates ahead, however, capital raising of ~| 5000 crore led to marginal decline in ABV to | 133 for FY21E. We revise our rating to HOLD (with a negative bias) from BUY as investors will be cautious for next 3-6 months, as upside risk to stressed book is probable. Therefore, we lower our target multiple to ~1.3x FY21E ABV and downgrade our target price to | 180 per share (from | 300 earlier). On the positive side, the bank has started recognising stress and with moderation in growth and positive change in accounting practices, RBI’s concerns may be partly addressed.
Outlook & Valuation: Higher credit costs, revised growth assumptions and lower fee income will have a bearing on the bank’s medium-term earnings and valuations, even as they are positive for sustainability of earnings over the longer term. Trimming our earnings estimates by 42%/37% for FY20E/FY21E to factor in lower balance sheet growth, weaker other income and higher provisioning, we revise our recommendation on the stock to HOLD from BUY with a revised Target Price of Rs220 (from Rs 290 earlier), based on 1.7x FY21E adjusted PB. We have factored in a capital raise of Rs50bn in FY20 at Rs220.
Yes bank is available at attractive valuations and lower P/BV amongst its peers. Prior also, we have recommended the stock with the target price of ` 236, which has been achieved. As banks operations has returned to normal, we expect this would help drive the share price further. Also, would enable bank in raising fresh capital. We therefore, re-rate the stock with the revised upward target of ` 356 in medium term, which corresponds to 2.50x P/BV for FY20Est., quite fair as major concerns are now being wiped out.
Probability Of Prospective Divergence Is Low We, recently, met Mr Raj Ahuja, CFO and Senior Group President, Mr Niranjan Banodkar, Senior President, Financial and Investor Strategy and Mr Sunny Desa, Senior VP, Financial and Investor Strategy, Yes Bank (YBL) and gleaned incremental insight into future prospects for the bank. The most key takeaway from our conversation with management was that the likelihood of Divergence with RBI in asset quality assessment in the future is low. We detail our takeaways below. We have also revised our estimates for FY20/FY21 and retained Buy rating on YBL, revising our target price to Rs329 (from Rs307 earlier) and valuing the stock at 1.8x 1HFY21E P/BV.
Valuation and view: With two of the key overhangs addressed (management and divergence), we expect the bank to now look at the capital raise issue over the next few months, which will help drive a gradual improvement in its operating performance. Maintain Buy with a target price of INR270 (1.8x Sep’20E ABV).
Strong YoY growth but asset quality weakens • The bank has addressed the leadership uncertainty by announcing the appointment of Mr.Ravneet Singh Gill as its next MD&CEO. • Net Interest Income (Interest income less interest expense) grew by 41% YoY and PAT shown a de-growth of 7% YoY on account of 37% YoY decrease in fee and other income. • Advances marked a growth of 42% YoY, with retail advances growth at 83% YoY and deposits grown by 30% YoY, but the business exhibited a muted sequential growth. • NIM declined by 20bps YoY to 3.3% due to rise in cost of funds, which increased by 50 bps YoY due to lower CASA ratio. • GNPA/NNPA ratios increased to 2.10%/1.18% against 1.72%/0.93 % on YoY due to impact from IL&FS exposure of Rs2530 Cr. • With a 20% CAGR growth in PAT over FY18-21E, we value Yes bank at 1.3x FY21E BVPS at a target price of Rs228 and recommend Hold rating.
Outlook: Yes Bank has posted mixed results for the quarter with impressive growth on one side and weakening of asset quality on the other. With the appointment of the new MD & CEO, some leadership uncertainty has been addressed, and will be taken positively by investors. However, in our opinion, the overhang still remains on the near-term strategy and execution by the new leadership and capital raising plans. The pending RBI’s report, will also be a near-term overhang that can throw up surprises. Looking at the bigger picture, we believe the stock still warrants caution. Valuation: Yes Bank currently trades at 1.4 times its FY20E book value, which reflects concerns on the multiple challenges that it faces. We thus maintain our Hold rating on the stock with revised PT of Rs. 245.
CEO Appointment Removes Some Uncertainty Yes Bank (YBL) reported 3QFY19 results with the key takeaways being: (1) Ravneet Gill, current MD, India operation for Deutsche Bank was appointed MD & CEO of Yes Bank with a joining date of 1st March or earlier (2) Of the aggregate funded exposure of Rs 25.3bn to infra conglomerate, Rs 19.13bn was recognized as NPA, aside of which, asset quality improved (3) YBL’s capital conservation strategy enabled it to marginally augment capital ratios on QoQ basis (4) YBL was able to maintain NIM QoQ at 3.3% despite rapid increase in IBU book, which is margin dilutive. (See comprehensive conference call takeaways on page 2 for significant incremental colour.). Per se, on the key P&L items, YBL posted NII growth of 41% YoY at Rs26,664mn, PPOP decline of 0.6% YoY at Rs19,904mn and PAT decline of 7% YoY at Rs10,019mn. We have revised our estimates for FY19/FY20/FY21 and retained Buy rating on YBL, revising our target price to Rs307 (from Rs283 earlier) and valuing the stock at 1.7x 1HFY21E P/BV.
Outlook & Valuation: Looking ahead, the Bank is well-placed to deliver a healthy loan growth with market share gain, as it has made consistent progress towards strengthening its low-cost retail franchise. Further, clarity over transition of new CEO will support the Bank’s capital raising plans. However, its large corporate portfolio with high NPA divergence in the past remains an area of watch. Higherthan-expected slippages owing to any divergence could impact our RoA estimates by 1.2/1.5% for FY19E/FY20E. At CMP, the stock trades at 1-year forward multiple of 1.5x, at a 25% discount to 5-year average valuations. Tweaking our earnings estimates for FY19E/FY20E to factor in higher provisioning and lower other income, we maintain our BUY recommendation on the stock with an unrevised Target Price of Rs260, based on 1.9x FY20E adjusted PB.
Leadership ambiguity over; future strategy to be monitored The announcement of Ravneet Singh Gill being appointed as new MD & CEO addresses uncertainty related to the top management. The change in leadership warrants a balance sheet clean-up and impact on earnings in near term. Therefore, we conservatively factor in higher credit cost in FY20E. Divergence in AQR continues to remain a near term risk. However, focus on improving retail franchise both asset as well as liability side is seen to remain structurally positive in the long run. Factoring in higher slippages, our ABV estimate dip in FY20E, post which is seen to revival led by moderation in NPA accretion. Rolling over to FY21E, we value the bank at 2.2x FY21E ABV assigning target price of | 300 per share. We have a BUY recommendation on the stock.
Outlook & Valuation: With induction of Mr Ranveet Gill, management overhang is behind, however, re-rating from hereon will depend on clarity regarding strategy of future business and capital raising plans. At CMP, YES trades at 1.55x FY20E P/ABV, which we believe is strong credential of new DM and superior RoE, hence, we recommend BUY with a Target Price of `280 over the next 12 months.
Yes Bank missed our earnings expectation, reporting PAT of Rs10.0bn (PLe: Rs11.1bn) which was mainly led by sharp drop in other income as bank started to see lower corporate fees (from slower incremental growth) and one time large MTM loss on swaps. Importantly, NII saw larger beat with much stronger growth of 41% YoY/10.0% QoQ, while provisions were relatively lower om investment write back helping support earning despite recognizing large part of IL&FS exposure. We have been re-iterating new MD & CEO appointment remains key event for the bank’s journey ahead which now starts bringing in credibility back but risks of higher asset quality recognitions and RBI AQR remain immediate concern. Also, delayed capital raising could slow growth significantly and lower CASA metrics, higher corporate share restricts increase in multiple at current juncture. We retain ACCUMULATE rating with revised TP of Rs245 (from Rs231) based on 1.6x (from 1.5x) Sep-20 ABV
RBI approves appointment of new MD & CEO Key overhang addressed; clarity on other issues to aid re-rating Yes Bank has received the RBI approval to appoint Mr Ravneet Gill as the new MD & CEO effective Mar 01, 2019. The appointment of the new MD & CEO has removed a big overhang from the stock, which has seen significant correction since the RBI’s denial of Mr. Kapoor’s continuation as Yes Bank’s MD & CEO. Also, induction of new members on the board of YES Bank after the departure of several board members should help address key strategic issues and concerns facing the bank. Further, with this appointment the strength of Yes Bank’s board is now fully restored (please refer inside for details). With management overhang done away with, we expect the bank to address other challenges which will help drive gradual improvement in operating performance. We maintain BUY rating with PT of INR270 (unchanged).
Uncertainties piling up The issues kick started to Yes bank when the RBI has denied the extension of Mr.Rana Kapur to continue as MD and CEO of the bank for next three years. Troubles continued to mount when rating agencies ICRA Ltd and CARE Ratings Ltd downgraded the private-sector lender’s debt instruments. Moody’s Investors Service downgraded Yes Bank’s ratings citing corporate governance concerns and impact of leadership change on the bank’s growth plan. Ashok Chawla, non-executive chairman of Yes Bank Ltd, the former Chairman of SBI, O.P. Bhatt (external expert of the 'Search and Selection Committee') and Vasant Gujrati, the chairman of the bank’s audit committee have resigned recently. The media reports regarding the promoter’s business and its transactions have impacted the credibility of the Bank. We reduce our valuation of Yes bank to 1.2x P/BV and revise our target price to Rs182 and recommend Hold rating.
Valuation: The bank’s growth has been impressive in the quarter but the asset quality has weakened. The bank also plans to raise PCR levels which effectively could impact near term bottom line. Going forward, the succession issue will likely impede capital raising plans and thus result in growth challenges in the near term. We have valued the bank at 1.3(x) its FY20E adj. book value and have arrived at a fair value of Rs.204 per share. At CMP of Rs 181, the stock is trading at P/ABV(x) of 1.2x its FY20E ABV. We have an ‘ACCUMULATE’ rating on stock.
Retain BUY, lowering target price to ₹ 270 We are revising our estimates downwards – PAT expected to grow by 7% yoy in FY19E taking into consideration higher credit cost and lower growth. Given the management change, capital raising would be difficult for the bank. Also, uncertainty over the NPAs looms large for the bank now than before. Near term headwinds on the bank remains in terms of management change, higher credit cost, lower capital position, which could cap upside in the stock, unless we see some positive resolution coming on above parameters. However, given the steep correction in the stock, current valuations looks reasonable - we retain BUY rating (reduce TP to ₹ 270 from ₹ 350, discounting FY20E ABV by 1.9x). At current pricing, the stock is trading at 1.6x FY19E and 1.3 FY20E ABV.
Performance not commensurate to growth & risk. Yes Bank's earnings came in below expectations at Rs9.6bn (PLe: Rs13.5bn) on provisions from MTM on corporate bonds (from one large exposure) and higher slippages of Rs16.3bn). NII momentum of 28% YoY looks slower (but better sequentially) based on the fact that bank showed historic loan growth of +60% YoY. Asset quality deteriorated largely pertaining to one large exposure and other slippages, while has exposure of Rs26.2bn to IL&FS SPVs which is standard and has not done any provisions. We continue to re-iterate MD & CEO appointment remains key event for the bank’s journey ahead and in near term capital efficiency has to be improved. Certain metrics have turned weaker like CASA mix, higher mix towards corporate (though retail increasing) and margins profile, which has to improve. We retain ACCUMULATE rating with revised TP of Rs231 (from Rs250) based on 1.5x Sep-20 ABV (from 1.7x Mar-20 ABV)
Valuations: PAT reported de-growth of 4%YoY & 23% QoQ to INR 9.6bn. Resultant, ROAA% dropped to 1.1% while ROAE% came at 14.4% down from 19.4% in previous quarter. Balance sheet growth was robust, although, funding cost pressured NIM, followed by weak non-interest income & higher provisioning dented bottom line. We expect NIM to remain under pressure. Currently, stock is trading at FY20E P/ABV of 1.4x, we value stock at 1.51x and arrive at a target price of INR 206 and assign hold rating.
Reality sinking in; bracing the uncertainty. The process to select the new MD & CEO should be over by first week of December and the incumbent MD & CEO should join earliest by Jan-19, if all the processes and RBI approval are received in time. While the near term uncertainty will remain till the new management takes charge and enunciates the business strategy, we believe that post sharp correction the stock is trading at reasonable valuations. We maintain our BUY rating with a TP of INR350.
Uncertainty to continue. We downgrade Yes Bank to ACCUMULATE (from BUY) with TP of Rs250 based on 1.8x FY20ABV (from 2.7x multiple). Yes bank’s outcome of board meeting has left several loose ends and prolongs uncertainty regarding the succession. It has recommended 1) establishment of committee to search & select a new MD & CEO and 2) request to RBI an extension for the MD &CEO up to April’19 at least to review the FY19 audited results and a further extension upto Sept’19 (till AGM) to oversee transition 3) appointed Mr. Rajat Monga & Mr. Praloy Mandal as EDs as a part of a long term succession planning. However, the board has not been able to give a clear picture on the succession and further course for the bank. The timelines and uncertainty on approvals from RBI for both MD & CEO (should be difficult) and EDs will keep near term stock performance muted.
Reflexivity Is Not My Friend. We take cognizance of events post-19th September and their real impact on the business outlook for Yes Bank (YBL). (1) The high quantum of YBL stock price decline on 21st September, we aver, was on the back of sentiment and not fundamentals. However, the same is going to have a durable impact on investor sentiment and, therefore, ultimately, on capital raising capacity for YBL (2) Press release dated 24th September re-iterates credit cost guidance for FY19 at 50bps-70bps, thereby maintaining uncertainty regarding how Divergence in FY17-end asset quality might be addressed. Uncertainty may continue to dampen sentiment of a section of the investor community. (3) Press release dated 25th September (outcome of Board Meeting) mentions formation of “Search & Selection Committee” for new CEO but also seeks to appoint Mr. Rajat Monga and Mr. Pralay Mondal (both Senior Group Presidents) as Executive Directors “to ensure a long-term succession plan within Yes Bank”. How RBI might view the said appointments of aforementioned internal candidates adds another dimension of uncertainty. (4) Apart from lower capital raising capacity, a new propensity to, on balance, accept lower-risk credits on the balance sheet could negatively impact with both loan growth and loan yield. As a consequence of these reasons, we revise estimates lower and also assign a lower multiple for YBL, to factor in continued impact on return ratios beyond FY21E. We retain Buy rating with a Target Price of Rs299, valuing YBL at 1.6 1HFY21E P/BV
Uncertainty on new leadership Yes bank witnessed a steep correction when RBI denied the three year extension of Mr.Rana Kapoor as CEO of the bank and asked him to step down due to regulatory and governance issue. The exit of Kapoor, who co-founded the bank in 2004 could impact the loan growth and may potentially affect the capital raising plans. Board has formed a five-member panel including two members from outside the bank to find a successor. The uncertainties about new leadership and capital raising plans are driving the valuation. We reduce our valuation of Yes bank to 1.6x P/BV and revise our target price to Rs253 and recommend Buy rating.
Valuation and view: This development has come in as a clear setback for the bank and will have implications on Yes Bank’s growth plans. The potential change in business strategy post the management change, as Yes Bank goes for a course correction and fully adheres to the RBI’s requirement, will likely have an impact on its loan growth/fee income, even as the capitalization level already remains modest. We note that while in the past the stock has reacted negatively to any such adverse incidents, the price performance over the next one-year following a crisis has always been impressive. We revise our TP to INR350 (from INR444) based on 2.0x forward ABV and maintain our BUY rating. Risk to our rating and target price would be from further developments on asset quality and management transition.
It’s all in the price already. We stress that considerations surrounding Rana Kapoor’s extension as MD & CEO of Yes Bank (YBL) is already largely in YBL stock price since (1) having to recognize upgraded divergent accounts (FY17-end) as NPA would imply only a 12.8% erosion of FY18 book value, even assuming a conservative 70% loss-given-default (2) stock price has already declined 19% due to these considerations since 20th August (3) We think, even as of 20th August, YBL stock price suffered a discount on considerations with regard to Divergence. We await further clarity on management action and retain estimates, Buy rating and Target price of Rs 461, valuing the stock at 2.3x 1HFY21E P/BV. Event description: YBL has notified stock exchanges that the RBI has intimated Yes Bank, via letter dated 17th September 2018, received on 19th September 2018, that current MD & CEO, Mr Rana Kapoor, may continue as the MD & CEO till 31st January 2019.
Outlook & Valuation We expect strong loan book growth (~30% CAGR till FY20E) with mix shifting towards retail banking, robust CASA growth (~40% for FY20E) and superior loan structuring skill restricting overall LGD will drive earnings growth (~34% EPS CAGR over FY18-20E) and return ratios of (22.7% ROE) going ahead. However, consistency in controlling NPAs below 2% is critical for sustained re-rating of the stock. We maintain our BUY rating on the stock with a Target Price of INR 496, implying a P/Adj. BV of 3.2x on FY20E Adj. BV of INR 153.
Outlook & Valuation: We expect strong loan book growth (~30% CAGR till FY20E) with mix shifting towards retail banking, robust CASA growth (~40% for FY20E) and superior loan structuring skill restricting overall LGD will drive earnings growth (~34% EPS CAGR over FY18-20E) and return ratios of (22.7% ROE) going ahead. However, consistency in controlling NPAs below 2% is critical for sustained re-rating of the stock. We maintain our BUY rating on the stock with a TP of INR 496, implying a P/Adj. BV of 3.2x on FY20E Adj. BV of INR 153.