Problems persist but proposed equity infusion raise hopes of stability
YES’ core earnings as well as provisions in Q2FY20 were in-line with our estimates and reflected the in-line trend observed in business momentum. However, balance sheet deterioration continued with incremental additions to the sub-investment grade book continuing to be high. The confirmation and reiteration of a US$1.2bn binding bid for equity infusion that YES had received was the most important development in months for YES. The management stated it was in discussions with more investors for further infusion. We believe it is a step in the right direction and if it goes through regulatory approvals, shall bring in much needed stability to YES’ core capital. We therefore turn ‘ACCUMULATE’ from ‘SELL’ while retaining the price target at Rs80.
– Core earnings in-line, net loss led by one-off DTA charge: YES’ core earnings, provisions, and business momentum were in-line with estimates. The miss at operating profit line was owing to a 6% higher than estimate opex. However, asset quality was a big miss with slippages ~2x higher than our estimate Rs30.4bn taking the GNPAs to 7.4%.
– Credit cost guidance increased: From a confident 125bps credit cost guidance post-Q1FY20 results, the YES management stated the likely band for credit cost was now 225-250bps for FY20E. This follows the continued deterioration in asset quality with slippages continuing to stay elevated and the sub-investment grade book expanding ~Rs20bn QoQ to Rs320bn in Q2FY20. The management reiterated that ~25% of the sub-investment grade book was likely to slip. Together with normal slippages, we believe slippages in H2FY20E can touch Rs150. We have accordingly raised slippage, NPA, and credit cost estimate and revised earnings downward.
– Binding bid for capital received, more in pipeline: YES management stated the US$1.2bn binding bid received from an investor backed by a large US financial institution was valid till Nov 30, 2019 and quick steps would be taken to screen and pass it forward for regulatory approval. Additionally, the bank is also in talks with another set of investors who could also be considered in the upcoming round of equity infusion. This is a key development for YES and if it goes through, shall provide much needed stability to the core equity.
– Management sanguine about resuming growth: Although the loan book shrunk ~7%YoY alongside impacting fee growth, the management appeared optimistic about resuming growth once capital infusion happened. YES continued to expand its retail and MSME franchise while growth was affected in corporate banking. We shall revisit business growth and earnings estimates post equity infusion.
Valuation: YES trades at 1.2x our revised FY21E ABV. We had adjusted Rs75bn in YES’ networth as likely stress while arriving at our ‘SELL’ TP post Q1FY20 results. With management reiterating likelihood of higher slippages, we retain our TP while turning ‘ACCUMULATE’ on rating in the backdrop of positive developments related to equity infusion.
Ratindg: ACCUMULATE | CMP: Rs 67 | Target Price: Rs 80| Upside: 19%