YES Bank, which reported a mixed set of numbers for the period ended on March 31, 2023, on Saturday, has seen a rating downgrade from domestic brokerage firm ICICI Securities. Interestingly, the brokerage firm expects another 15 per cent downside in the stock from current levels.

YES Bank reported a mixed set of Q4FY23 earnings with healthy business growth, NIMs and improvement in headline net stress, though profitability (RoA at 0.2 per cent) remained weak due to continued investment in franchise and retail orientation, said ICICI Securities.

The private sector lender reported a 45 per cent fall in its net profit at Rs 202 crore March 2023 quarter on a year-on-year (YoY) basis, which was Rs 367.46 crore profit in the corresponding quarter of the previous fiscal. The profit after tax was below the Street’s estimates. However, the net profit was up nearly 290% sequentially versus Rs 51.52 crore reported in Q3FY23.

YES Bank’s net interest income (NIIs) rose 15.7 per cent to Rs 21,050 crore, while the net interest margin (NIMs) was at 2.80 per cent. However, the gross NPA ratio was down from 13.93 per cent on YoY comparison.  The net NPA ratio was at 0.83 per cent, down from 1.03 per cent in the prior three months.

Provisions and contingencies increased to Rs 618 crore from Rs 271 crore in the year-ago period and the lender’s asset quality was mixed. The gross non-performing asset (NPA) ratio rose to 2.17 per cent from 2.02 per cent in the December quarter.

Despite sectoral headwinds, we have been impressed by YES Bank’s remarkable progress in ‘retailisation’ of the balance sheet, sharp clean-up in asset quality and improved capital levels, said ICICI Securities. The bank appears to be the preferred banker to ‘Digital India’ and has a disproportionate market share in digital payments, it said.

ICICI Securities has revised its FY24 earnings estimates and introduced FY25 estimates. It has arrived at a new target price of Rs13.5, valuing the stock at 0.9 times FY25E adjusted book value (ABV). Risk rewards appear unattractive with the stock trading at 1.0 times FY25 ABV for single-digit RoE. It has downgraded the stock to ‘reduce’ from ‘hold’ in its latest report.

Shares of Yes Bank were trading at Rs 15.78 on Tuesday and ICICI Securities’ target of Rs 13.5 suggested a downside of another 15 per cent in the counter. The stock is currently 37 per cent down from its 52-week high at Rs 24.75 hit in December 2022.

“Despite building in modest credit costs at 50bps for FY24 and 25, we see the bank reporting sub-par RoAs at 0.6-0.7 per cent,” said ICICI Securities. YES Bank has additional lumpy risks on AT-1 bonds write-offs litigation (about 300 bps of CET 1 impact in the worst case), which is pending in the Supreme Court, it added.

After capital raise in Q3FY23, bank CET-1 now stands at 13.3 per cent and post full warrant conversion, it expects a further 150 bps accrual to CET I ratio. This conversion is likely to be completed by Q1FY25, as per management commentary. However, the bank faces lumpy risk from the recent litigation on AT-1 bonds write-offs. The matter is currently pending before the Supreme Court, it said.

Kotak Institutional Equities has also maintained its ‘reduce’ rating but its fair value target of Rs 16 as it sees valuations are not inexpensive to change its view. The bank has a comfortable capital position today but is operating in a market with broadly similar lending philosophy and a weaker liability profile, it said.

“Asset quality stress is negligible after the NPL sell-down in the previous quarter. Normalization of return ratios is still a few years away and the high-cost structure of the business would need a combination of growth ramp-up, improvement in revenue profile or reduction in costs,” Kotak added.

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