Stock Update

Revival looks farfetched, downgrade to Hold

Key points
Yes Bank
ŠŠ RBI’s appointment of Additional Director (u/s
Reco: Hold | CMP: Rs144 Section 36AB of the Indian Banking Act) rings
alarm bells: The Reserve Bank of India (RBI) has
appointed Mr. R Gandhi (former RBI Dy Governor)
Company details as a Director on the board of Yes Bank u/s
Price target: Under Review Section 36AB of Banking Regulation Act, 1949
(subsection-1). Notably, the abovementioned
Market cap: Rs33,276 cr section empowers the RBI to appoint additional
52-week high/low: Rs404 / 143 directors on the board to safeguard the interests of
the bank or its depositors. It is rare for the banking
NSE volume: (No of shares) 570.1 lakh regulator to make a special board appointment. In
BSE code: 532648 the past, there have been a few instances of such
appointments, but the banks in question were
NSE code: YESBANK small and troubled. This is the first time that the
RBI has done so for a front-line bank.
Sharekhan code: YESBANK
Free float: (No of shares) 185.7 cr Though the appointment will bring closer
supervision of the RBI, it will also bring
uncertainties for the course correction and further
Shareholding pattern dampen the investors’ confidence in the stock.
ŠŠ Outlook - Confluence of negative developments
warrants caution: Cleaning up of books with a
Promoter view to improve book quality and business mix is
20% positive, but recent events indicate that the twin
problems of regulatory overhang and questions
on near-term capital raising have returned for
the bank.
Public
Recent rating downgrades will make incremental
80%
capital raising (Tier 2) costlier for the bank.
Presently, Yes Bank is already inched close to
the comfort threshold (CET 1 - 8.4%, Tier 1 - 11.3%).
Hence, capital raising would be sorely needed.
Price chart However, in the backdrop of rating downgrades
as well as concerns on governance issues
450
resurfacing, we believe raising equity capital for
400

350
the bank becomes difficult once again.
300
Hence, we are tempering our growth and
250
earnings estimates in the given light of the
200
changed circumstances. We believe the outlook
150
has deteriorated meaningfully. Hence, investor
100
caution is warranted.
50

0
ŠŠ Valuation: Multiple risks, no remedy in sight
Jun-18

Jan-19

May-19
May-18

Nov-18
Aug-18
Jul-18

Feb-19

Mar-19

Apr-19
Sep-18

Oct-18

Oct-18

Dec-18

- Downgrade to Hold: At present valuations of

~1.1x its FY2021E BV, although prima facie the
valuations appear reasonable, uncertainties
Price performance
owing to earnings risks, higher risks of dilution
(%) 1m 3m 6m 12m at lower valuations and risk of further upward
revision in stressed book cloud the probability of
Absolute -41.8 -29.6 -29.9 -54.4 a multiple re-rating in the stock. Given multiple
Relative to Sensex -39.6 -32.4 -34.2 -57.1 risks and uncertainties, we have downgraded
our rating to Hold from Buy, while keeping the
price target under review.

May 15, 2019 2

Sharekhan Stock Update

ŠŠ Series of rating downgrade by rating agencies:
Recently, top credit rating agencies have
also downgraded Yes Bank’s ratings, citing
concerns on its loan book quality and risk
management practices. Top rating agencies
such as ICRA [(revised its rating outlook from
stable to (Negative)], CARE (revised its ratings
on AT I bonds to ‘A -Negative’ from ‘AA’) and
Ind-Ra (downgraded Yes Bank’s Long-Term
Issuer Rating to ‘IND AA-‘ from ‘IND AA+’) have
downgraded the debt paper for Yes Bank.
The agencies have cited various reasons,
including significant credit migration (to sub-
investment grade) and certain corporate
segments (entertainment, infra, housing and
real estate) exposure of the bank facing tough
times. Rating agencies have also opined about
the insufficiency of present level of capital
buffers to absorb expected credit costs in case
of Yes Bank.
Due to the ratings downgrade, we believe the
narrative has changed for the worse for Yes
Bank, which will not only raise borrowing costs
for Yes Bank, but will also impact its equity
capital-raising plans, at least in the near term.
Considering its present capital ratios (CET-1 at
8.4%, Tier-1 at 11.3%), we believe there is little
headroom available for the bank. Sluggish
operating performance or material deterioration
in the deposit and funding profile of the bank
may lead to further risks on the credit rating
side.

Profit and loss statement Rs cr

Particulars FY18 FY19 FY20E FY21E
Net interest income 7,737 9,809 10,037 10,615
Non-interest income 5,224 4,590 5,719 6,498
Net total income 12,961 14,399 15,756 17,113
Operating expenses 5,213 6,264 8,174 10,297
Pre-provisioning profit 7,748 8,135 7,582 6,817
Provision & Contingency 1,554 5,778 4,470 3,631
Profit before tax 6,194 2,357 3,112 3,185
Tax 1,970 637 1,027 1,051
Profit after tax 4,225 1,721 2,085 2,134

Balance sheet Rs cr
Liabilities FY18 FY19 FY20E FY21E
Liabilities
Networth 25,758 26,841 28,669 30,302
Deposits 200,738 227,610 261,752 301,014
Borrowings 74,894 108,424 78,526 90,304
Other liabilities & provisions 11,056 17,951 36,645 42,286
Total liabilities 312,446 380,826 405,592 463,907
Assets
Cash & balances with RBI 11,426 10,798 11,517 13,245
Balances with banks & money at call 13,309 16,092 20,940 24,081
Investments 68,399 89,522 52,350 60,203
Advances 203,534 241,500 277,725 327,715
Fixed assets 832 817 1,101 1,266
Other assets 14,946 22,098 41,959 37,397
Total assets 312,446 380,826 405,592 463,907

May 15, 2019 3

Sharekhan Stock Update

Key ratios Rs cr
Particulars FY18 FY19 FY20E FY21E
Per share Data (Rs)
Earnings 18.3 7.5 9.1 9.3
Dividend 0.0 1.7 1.8 1.9
Book value 111.7 116.4 124.4 131.5
Adj. book value 106.0 108.8 111.4 114.0
Spreads (%)
Yield on Advances 9.2 9.4 9.2 9.2
Cost of Deposits 5.5 6.1 6.1 5.8
Net interest margins 3.1 3.3 3.1 3.0
Operating ratios (%)
Credit to Deposit 101.4 106.1 106.1 108.9
Cost to income 40.2 43.5 51.9 60.2
CASA 36.5 33.0 38.8 45.5
Return ratios (%)
RoE 17.7 6.5 7.5 7.2
RoA 1.7 0.5 0.6 0.5
Asset Quality ratios (%)
Gross NPA 1.3 3.2 2.4 2.5
Net NPA 0.6 1.9 1.1 1.2
Growth Ratios (%)
Net interest income 33.5 26.8 2.3 5.8
Pre-provisioning profit 32.7 5.0 -6.8 -10.1
Profit after tax 26.9 -59.3 21.2 2.4
Advances 53.9 18.7 15.0 18.0
Deposits 40.5 13.4 15.0 15.0
Valuation ratios (x)
P/E 7.8 19.2 15.9 15.5
P/BV 1.3 1.2 1.2 1.1
P/ABV 1.4 1.3 1.3 1.3

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

May 15, 2019 4

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