Cogencis, Tuesday, Apr 30
By Anshika Kayastha
MUMBAI - Most analysts have termed YES Bank's aggressive recognition and provisioning of stressed assets as a 'kitchen sinking' exercise. However, the management has attributed it to a conservative approach to asset quality, "episodic nature" of its portfolio, and headwinds from the recent liquidity crisis in the banking system.
Though the management seems candid about the weakness in its current model, and the long and painful journey ahead, analysts are in no mood to give the bank points for being honest. This is especially so because the management has also guided for a muted 1% return on assets in the near term and 1.5% from a long-term perspective, suggesting a weak performance in the coming few quarters.
Most brokerages have advised investors to sell the stock. But what is more surprising is that despite a revision in the price targets, the estimates by these analysts remain in a wide range, indicating lack of consensus regarding the bank's future performance.
The price target for shares of YES Bank is now largely in the range of 125-280 rupees, from 160-279 rupees earlier.
YES Bank reported a shocking 15.1-bln-rupee loss for the Jan-Mar quarter because of a nine-fold on-year increase in provisions, and a 38% fall in operating profit due to a steep decline in non-interest income.
Despite that, the bank declared a dividend of 2 rupees per share, to everyone's surprise.
Analysts have taken some comfort from the management's guidance, with most saying that though the next few quarters could be difficult, the bank is on the right path to recovery.
Markets, though, have been unforgiving, signalling a complete lack of faith in the management's guidance.
Shares of the bank saw their sharpest ever fall today, tanking over 30% to a four-month low of 165.60 rupees on the National Stock Exchange. The stock ended 29.2% lower at 168 rupees, following the three-day extended weekend, as the results were declared post market hours on Friday.
In the post earnings conference call, the management announced a three-pronged approach for making the business more granular. This includes improving the liability franchise, expanding the retail, small and medium enterprise loan portfolios, and focus on the corporate transaction banking business.
"While we acknowledge that it is an uphill task, we believe the steps are in the right direction. The new CEO aspires for a better diversification of asset mix, better structuring of exposures and mentioned that governance and compliance is of paramount importance," JM Financial Research said in a note.
Moody's said that the balance sheet clean-up exercise, which resulted in the bank reporting its first loss since its inception in 2004, will continue to strain the bank's profitability in the next 12-18 months as it provides for the stressed assets.
However, the global rating agency remains optimistic on the bank saying that despite the near-term weakness, the change in corporate behaviour under the new leadership will be "credit positive after the de-risking is complete".
The bank's shift to a liability-led approach as compared to an asset-led approach in recent years is seen as a positive by most analysts, in addition to the promise of increased regulatory compliance and uncompromising governance.
In line with this, the bank has guided for 80% branch profitability by 2022-23, and 100% by 2024-25 by growing its employee base. Currently, only 30% of the bank's branches are profit making.
This too, will increase costs for the bank, which given the weak revenue profile could increase the pain to deliver better return on equity.
A sharp sequential rise in the share of 'BB' and below rated loan portfolio by 460 basis points to 7% in Jan-Mar remains a major concern despite the 21-bln-rupee contingent provisioning by the bank. Of this, real estate, media and entertainment, and infrastructure comprise the majority share.
This could also result in a 125-bps rise in the bank's provisioning requirements for 2019-20, owing to the high probability of default in these loans in the short term.
What has also caught the market by surprise is the bank announcing a new stress book, constituting around 4% of the total loans, despite getting a clean chit from the Reserve Bank of India for 2017-18.
The bank reported gross slippages of 34.81 bln rupees in Jan-Mar, of which nearly 11 bln rupees was due to its exposure to the IL&FS Group and Jet Airways.
The bank's total stressed assets, including gross bad loans, standard restructured loans, security receipts and special mention accounts-II category, rose 190 bps on quarter to around 5% of total loans as of Mar 31.
This resulted in the credit costs surging to 137 bps in Jan-Mar alone, taking 2018-19 credit costs to 209 bps. The bank had initially guided for 50-70 bps of credit costs for 2018-19, which was revised upwards after the Oct-Dec results to 80 bps. The bank has now guided for credit cost of 120 bps for 2019-20.
In spite of this, analysts believe there is scope for a further upward revision in the bank's guidance for credit costs for 2019-20, due to weak return on equity and low common equity tier-I capital.
Further, even if the actual default is lesser than what the bank has provided for, it will still need to make higher provisions in the interim to meet regulatory requirements, which is seen hitting the bank's capital ratios, analysts said.
They added that the risk of default from the bank's high exposure to a few stressed sectors such as power and real estate is also very high.
The bank's 2.4-bln-rupee provisioning for marked-to-market losses seems inadequate, and the bank will have to provide more in 2019-20, analysts said.
This, combined with an expected slowdown in loan growth, as the bank realigns its portfolio to reduce concentration risk, and make headroom for better capital adequacy levels, are the key reasons for expectations of a decline in revenue and weak earnings performance going ahead.
"Ability to build a retail loan portfolio is challenging especially when the bank has a negligible customer base where it can cross sell and reduce its costs and lower credit risks," Kotak Institutional Equities said in a note.
The bank's capital adequacy ratio, as per Basel-III norms, was 16.5% as on Mar 31, of which tier-I capital accounted for 11.3%, and common equity tier-I capital for 8.4%.
Analysts expect the bank's loans in 2019-20 and 2020-21 to grow 20-25% on a compounded annual basis, compared with an average loan growth of 34% annually between fiscal 2014-15 and 2018-19. Over the next 5-6 years, the bank is aiming at a portfolio mix comprising 50% corporate advances, and 50% retail and small and medium enterprise loans.
In case the bank's loan growth is higher than the estimated 20-25%, the management's guidance of 9.5% common equity tier-I capital--the lowest among private sector banks--and the proposed fund raising of $1 bln will be sufficient for only one year of growth, forcing it to raise funds again the next year, Morgan Stanley Research said.
Guidance for the bank's other income has also been revised to around 10% for 2019-20 and 2020-21, following the 63% on-year decline in the March quarter. Resultantly, the bank's margin is also seen shrinking by 40-50 bps in the next two financial years, also due to higher bad loans and a slowdown in the high-margin structured finance business.
The bank's progress in terms of shoring up its capital adequacy, managing its stressed portfolio, and execution risk will be key factors to monitor going ahead, analysts said.
"With management focus on stress recognition and accounting policies and building a stronger liability franchise, such changes would be positive in the longer run as they address most of the investors' and regulator's concerns and would aid in building a stronger and sustainable business model. In the medium term, however, this would lead to significantly lower profitability," Anand Rathi Financial Services said. End
Edited by Maheswaran Parameswaran
