Yes Bank likely to see long term trends remain intact

The recent under performance in Yes Bank’s (YES) stock has been triggered by concerns of worsening asset quality amid tightening regulations. We believe YES has robust resolution processes and will be able to recover the bulk of its stressed assets. The strong corporate loan growth, while opportunistic, is driven with a specific strategy in mind. In time, focus on growing granular assets would regain importance as the current opportunity subsides. In the medium term, YES will likely report contained slippages, sharply reduced diver gencein the next RBI supervision and improved risk adjusted returns. These would drive stock returns.

YES’ corporate loan growth has accelerated in the last few years. Softening competition from ICICIBC, AXSB and PSU Banks (ex-SBI), a large net worth and targeted acquisition of core banking relationships with highly rated corporate accounts has driven such growth. In the short term, this would exert pressure on NIMs and capital. In the long term, this would augment fees and liabilities, and provide cross-selling opportunities.

Management insists that the RBI circular will not accelerate its delinquencies. It proactively identifies stress and has adequate safe guards in contracts. Management remains confident of higher resolutions from stressed assets (3.2% of loans as of 3QFY18). YES has aligned identification of NPA with the RBI and expects minimal divergence going ahead.

Despite short term challenges to margins and asset quality, long term trends would remain intact. YES would continue to build its retail assets and liabilities, increase engagement with SME and improve profitability, thereby reducing capital burn. At 1.9x FY20ii BVPS, valuations are attractive. Key stock catalysts would be: i) contained slippages, ii) minimal divergence versus RBI supervision and iii) improving NIMs.

Yes Bank