Yes Bank’s loan carpet is clean but it still needs insurance

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Unlike previous quarters, Yes Bank Ltd’s third-quarter results didn’t throw up nasty surprises on asset quality, but this didn’t seem to give enough incentive for investors to flock to the stock.

The private sector lender reported a net profit of Rs1,076.9 crore, 22% higher from a year ago, but the stock ended 0.66% lower. It should be noted though that the stock has surged more than 10% in the last three months on hopes that the September quarter was the worst.

The previous quarters showed that the lender had grossly miscalculated about its asset quality. The massive divergence in reported bad loans for fiscal year 2017 that the Reserve Bank of India’s scrutiny of the lender’s books revealed, damaged the trust investors had. A key question was whether Yes Bank is finally giving a true picture of its asset quality. The third quarter showed that the bank has indeed learnt its lesson and provided for all its past indiscretions.

Yes Bank did manage to keep a lid on fresh slippages. In the three months ended December, it labelled Rs494.9 crore worth of loans as bad.

Its strong advances growth of 46.5% gave a pleasing gloss to the bad loan ratios with gross non-performing assets (NPAs) falling to 1.72% of total loans from 1.82% in the September quarter. Net NPAs dropped to 0.93% of advances in the December quarter from 1.04% in the three months ended September.

That brings us to the second more important question. Has Yes Bank provided for every risk on asset quality?

The management has said that it has made adequate provisioning for all accounts referred under the Insolvency and Bankruptcy Code (IBC) to which it has an exposure of Rs1,342.4 crore. The fact that provisions are up a massive 265% from a year ago is proof of this.

Be that as it may, the private sector lender’s provision coverage ratio is a pitiful 46.4%. That means Yes Bank is exposed to future blows to asset quality. The lender has around Rs800 crore as restructured advances under various regulatory schemes in addition to the Rs1,342.4 crore under IBC. A resolution where haircuts don’t go beyond 50% is essential for Yes Bank’s future profitability.

So while the private sector lender may have no hidden dirt under its carpet, it could do with a bit more insurance against future risk.livemint