It was a quarterly performance that ticked all boxes. Stung by the bad press of the previous quarter’s numbers, Yes Bank seems to have been determined to erase all the memories. So not just the numbers, but the quality of disclosure, too, was superior this time around. With best-in-class asset quality, strong growth momentum and a focused approach to retail banking, Yes has positioned itself strongly. If all goes to plan, the bank could command the valuation enjoyed by the likes of Kotak, HDFC and IndusInd. At 3.2 times FY18 adjusted book, investors have reasons to cheer besides the strong first quarter numbers. The 5 for 1 stock split should give psychological comfort to retail investors looking to own the stock.
Strong Growth across the Board
Yes Bank’s numbers were robust. The 32 percent growth in net profit was driven by a 44 percent jump in net interest income (difference between interest income and interest expenses). A 32 percent increase in loans and a 30 basis points improvement in margin aided this performance, which by far has been the strongest in the banking universe.
The strong growth in income helped keep costs to income ratio on a leash despite a steep increase in operating expenses. The bank has prudently provided for future surprises and consequently saw 38 percent jump in provisions.
Asset Quality – Good with Equally Good Disclosures
The Jaiprakash account of Rs 911 crore has turned out to be the joker in the pack. It was the root cause of pain last quarter and post the Ultratech deal, it has given Yes Bank a provision buffer of Rs 227 crore, as the bank has decided not to reverse the provision taken on the same. The provision cover has, therefore, jumped sharply to 60 percent level.
The gross slippage in this quarter was a meagre Rs 201 crore. The so-called iffy loan accounts of Yes Bank now stand at 1.63 percent of advances.
The bank has two exposures out of the twelve accounts that went for resolution under IBC (Insolvency and bankruptcy code) with a total exposure of Rs 343 crore. Provisions of Rs 94.6 crore have been taken in the quarter for the same. The management added that a careful scrutiny of their books reveal that even if RBI identifies the next round of troubled accounts, the bank’s exposure would be limited to Rs 290 crore (0.2 percent of advances).
High Quality Book even in the Troubled Sector
Yes Bank’s total exposure to stressed sectors stands at 23.7 percent. In iron & steel, EPC and telecom, the lion’s share of the assets are rated A and above. Power appears to be an area of caution. Out here, the bank has a large exposure to renewable and the management highlighted its intention to rejig this portfolio in light of the recent development in that space. The transmission & distribution as well as the operational non-renewable portfolio appears to be in fine fettle.
What can Re-rate the Bank from this Level?
We feel the bank has delivered well in this down-cycle. However, with 68 percent of assets being corporate, lingering fears of a mishap is holding back investors from giving Yes Bank a premium valuation. Going forward, a more balanced mix of assets and a steady step-up in low-cost deposits would be the key monitorables.
The bank has done a commendable job on the low-cost deposits front with a strong growth in low cost deposits (CASA). The management is confident of hitting the 40 percent CASA mark in the next five quarters.
NIM (Net Interest Margin) Improvement on the Cards
Yes has a clear strategy of hitting the magic figure of 4 percent net interest margin in the next three years. Besides the recent capital raising (which automatically bumps up margin), the bank is expecting margin support from rising low-cost deposits, headroom to re-price savings accounts deposits, ability to raise infrastructure bonds at competitive rates and in-house sourcing of priority sector assets.
Improving Market Share
The bank has stepped up its presence in the credit market. A 7.8 percent share in incremental systemic credit has boosted its overall share to 1.8 percent from 1.5 percent in the previous year. The only piece that now needs to accelerate is the share of assets in retail and SME.
The stock has had a fantastic run. But should the bank show good progress on its targets, investors can expect another round of re-rating.