Heavy lifting by SBI, others fail to do the trick for YES Bank

Despite the fall in CAR and a weak Q4, YES Bank's stock closed Thursday’s trade with gains of over 6 per cent and even got locked in the upper circuit twice during the day
YES Bank will be reckoned as the only bank to get a highly qualified audit report where its solvency and sustenance came under the hammer as its capital adequacy ratio (CAR) again dipped to 6.3 per cent, a few notches below the regulatory requirement of 7.15 per cent. In March, after notable players, such as State Bank of India, HDFC, and ICICI Bank, infused Rs 10,000 crore in the bank, YES Bank's CET-1 ratio had improved from 0.6 per cent in Q3, to 7.6 per cent.

Despite the fall in CAR and a weak Q4, YES Bank's stock closed Thursday’s trade with gains of over 6 per cent and even got locked in the upper circuit twice during the day, for reasons beyond comprehension.

 
Investors, however, should not take Thursday’s price move as a positive indicator. If any, the newly appointed chief executive officer, Prashant Kumar, is faced with similar challenges that his predecessor Ravneet Gill had -- stunted growth, mountainous bad loans, capital constraints, and inability to arrest the run on deposits.

The net interest income, which fell 31 per cent year-on-year (YoY) to Rs 1,274 crore in Q4, was far inadequate to absorb Rs 4,872 crore of provisioning cost. While provisioning for bad loans has come off significantly from December’s Rs 24,766 crore, it suggested the need for more stress recognition.

 

 
The gross non-performing assets (NPA) ratio stood at 16.8 per cent, 200 basis points lower sequentially. The silver lining is the slippage ratio, or loans turning bad, halving to 5.74 per cent in Q4, indicating the new management may have been accurate in identifying stress. That said, the management said the current operating condition may see the slippage ratio increase to 8-9 per cent in FY21 (earlier projection was 5 per cent), thereby eating into capital.

What’s equally concerning is the run on deposits. SBI's lending support may not have helped YES Bank. Q4 marked the third consecutive quarter of deposit outflow; down 36 per cent sequentially to Rs 1.05 trillion. The share of low-cost current account–savings account (CASA) deposits plunging to 26.6 per cent positions YES Bank unfavourably among peers.

In all, as the auditors mentioned, comfort on the YES Bank stock hinges on Kumar's ability to bring in Rs 15,000 crore of capital quickly. Analysts at Credit Suisse say increased uncertainty in the current environment adds to risk aversion, and liquidity will remain a challenge for smaller private banks.

 
Until then, investors should avoid buying the stock.


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