Stock Update Revival Looks Farfetched, Downgrade to Hold

Stock Update Revival looks farfetched, downgrade to Hold

Key points Yes Bank 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. 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 the bank becomes difficult once again. 350 300 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 Valuation: Multiple risks, no remedy in sight 18 18 18 19 19 18 18 19 18 18 18 19 19 18 ------

Jul - Downgrade to Hold: At present valuations of Oct Oct Apr Jun Jan Feb Sep Mar Dec Nov Aug May May ~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

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

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May 15, 2019 4 Know more about our products and services

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