YES Bank’s shrinking business is worrying, say analysts.
From being placed under moratorium in March to having a new management team that has proved effective on many counts — arresting the run on deposits, bolstering capital adequacy, and charting a new growth strategy — the past six months have been a whirlwind for YES Bank.
It has repaid in full the special liquidity facility (Rs 50,000 crore) availed from the Reserve Bank of India (RBI). Nearly five rating agencies, including Moody’s, have upgraded their ratings on various facilities of YES Bank
in a month.
The change appears to have been triggered by the follow-on public offering (FPO) of Rs 15,000 crore raised at Rs 12 per share — which altered the opinion of most rating agencies — as it increased the tier-1 capital adequacy ratio from 6.5 per cent to 13.4 per cent.
However, from an investor’s perspective — more importantly, from a retail investor’s perspective — it might be too early to join the bandwagon. YES Bank’s Rs 45 crore net profit, though meagre, reiterated the management’s commitment to completely repair and overhaul financials.
The key takeaways were the 78 per cent sequential reduction in provisioning cost and 11 per cent growth in deposits. However, equity came only in July and provisioning cost might bulge once again, given the capital comfort. In the June quarter (Q1), the lender was starved for capital, which could have restricted it to make higher provisions.
As for deposits, current account deposits grew 8 per cent sequentially in Q1, while savings deposits (a better indicator of retail money) shrank 1 per cent. The share of retail deposits to total deposits declined from 37 per cent in the March quarter to 33 per cent in Q1. “Retail term deposits will be a key number to watch out for,” says Suresh Ganapathy of Macquarie Capital.
The larger concern for Siddharth Purohit of SMC Capital is the bank’s shrinking business. While the entire banking sector
is witnessing a moderation because of the economic disruption caused by the pandemic, YES Bank
could be hit harder in terms of business growth and loan recoveries, both of which are crucial to the lender’s new path.
YES Bank had a strong quarter operationally, even though loans and advances declined by 4 per cent sequentially in Q1. “It’s too early to give it a clean chit and Covid related pressures will be revealed only by year-end. Can the bank grow without consuming capital is the question,” Purohit says.
And then, there’s the perpetual question of whether the worst in terms of asset quality woes is behind the bank. Analysts at Kotak Institutional Equities have assumed YES Bank’s slippage ratio (or loans turning bad) at 13 per cent for FY21-22 (as against management guidance of 5 per cent) and credit cost of 5 per cent for FY21 and 3.3 per cent for FY22.
What’s more, trading at Rs 14.26 a piece, YES Bank stocks might seem cheap, but it is at a steep premium to RBL Bank and IndusInd Bank, without fundamentals supporting the valuation.
Sample this: Pre-FPO investors have taken a 90 per cent equity dilution and have to stay put in this position for the next two years. “We have not come to a point where we can establish a thesis that justifies this premium,” the Kotak analysts’ note said.
There’s also the risk of another capital dilution if internal accruals do not support capital accretion. According to Ganapathy, Rs 20,000 crore of accounts are yet to be recognised as bad, which could entail provisioning of Rs 14,000 crore and Rs 9,000 crore is the minimum required to meet the capital adequacy norms. “We estimate the total requirement without considering growth capital needs at Rs 23,000 crore in less than a year,” he says.
In all, with limited room for error, multiple uncertainties and abundant supply of shares in the secondary market, investors shouldn’t rush into the YES Bank stock.