Q2 Results: Brokerages Remain Concerned On Yes Bank’s Asset Quality; Stock Swings

Analysts remained concerned on Yes Bank Ltd.’s deteriorating asset quality, which resulted in the private sector lender reporting a wider-than-anticipated loss in the second quarter.

The stock declined as much as 14.9 percent in opening trade but recovered losses to gain 2.5 percent thereafter as of 10:25 a.m.

The bank’s gross non-performing assets rose to 7.39 percent in the July-September period from 5.01 percent in the preceding quarter, while net non-performing assets rose to 4.35 percent from 2.91 percent, according to an exchange filing. Slippages, or fresh bad loans, during the quarter stood at Rs 5,945 crore. Half of the slippages came from the BBB-rated and below category book—about 10 percent of the lender’s loan book.

Yes Bank also reported a net loss of Rs 600 crore during the second quarter compared with a profit of Rs 964.7 crore a year ago. The loss, it said, was due to a one-time direct tax asset adjustment of Rs 709 crore as the bank chose a lower tax rate under the new corporate tax structure.

The bank is in discussion to raise $1.6 billion from six global private equity funds and two domestic mutual funds. The private lender, in a post-earnings conference call with analysts, said it received a binding offer of $1.2 billion from an investor backed by a U.S. financial institution and has the financial ability to make the acquisition.

Also, talks are on to raise a further $3 billion from two groups of domestic investors, including two family offices and two financial investors. Overall, the bank told analysts that they expect potential money worth $3 billion to come in and will be looking at all options with an open mind.

The brokerages, though cut target prices for Yes Bank, said the capital-raising could ease some risks and help stabilise business.

Shares of Yes Bank tumbled as much as 14.9 percent at open but soon pared some of its losses to trade 4.9 percent lower at Rs 63.30 apiece. That compares with a 0.64 percent gain in the benchmark Nifty 50 Index.

Here’s what analysts have to say about Yes Bank’s second-quarter earnings…

Macquarie

• Maintains ‘underperform’ with a target price of Rs 50 apiece.
• It’s all about capital and asset quality.
• Credit cost estimate could negatively surprise.
• Seriously doubt management’s ability to assess the risk.
• No contingent provisions against BB and below book and BBB book.
• If 50 percent of BB and below book gets wiped off, almost 50 percent of the book value will have to be written down.

Edelweiss

• Cuts target price to Rs 70 apiece from Rs 110 earlier.
• Build-in gross NPAs of more than 11 percent (7 percent currently) by FY21.
• Binding offer ($1.2 billion) will boost capital—a key trigger. Still, contingent on regulatory approval.
• Building capital (highly dilutive) translates into book value cut of 14 percent/13 percent for FY20/FY21 and assigning 1.0x Price-to-adjusted book value.

Kotak Securities

• Maintains ‘sell’ with a target price of Rs 55 apiece.
• Quite likely that a substantial portion of BB and below book would slip into bad loan in the medium term.
• Capital-raising solves one critical issue, but many persist.
• Dilution to book value would be high as the bank would make higher provisions on this capital raised.
• Still unsure of growth, excess capital, path of return on equity improvement.
• Stability of the senior management is critical at this juncture.

Prabhudas Lilladher

• Retains ‘hold’ with a target price of Rs 55 a share.
• Capital-raise should cushion risks to some extent but raising below book is very dilutive, limiting upside on stock.
• Higher additions to sub-investment grade book and lumpy exposures remains a big risk to asset quality added by sluggish resolutions.

JPMorgan

• Cuts target price to Rs 55 from Rs 60 earlier, valuing the bank at 0.5x its estimated FY21 price/book value.
• Cuts EPS estimates by 14-18 percent for FY21-22.
• Capital-raise key for stabilising the business and improving confidence.

Emkay Global

• Maintains ‘sell’ with a target price of Rs 45 apiece.
• Asset quality woes to continue, need regular capital dose to thrive.
• Real estate/telecom can add further stress.
• Heavy capital injection, if any, may ease the current pressure on the capital front.
• Unabated stress flow will keep the P/L bleeding and call for prolonged dilution risk for investors.

Credit Suisse

• Expects valuations to remain under pressure.
• Maintains ‘neutral’ with a target of Rs 60 a share.
• Deposits contracted 7 percent sequentially, while CASA was flat at 30.2 percent, and savings accounts deposits declined 9 percent quarter-on-quarter and 20 percent over the last year.
• Provision needs over the next two years are likely to be in excess of $2 billion.
• Capital raised will not suffice in providing any growth capital, given the growing provision needs.