YES Bank earnings may be hit by slower loan growth, rise in credit cost

The Reserve Bank of India’s (RBI) decision to cut short Rana Kapoor’s term as managing director and chief executive officer of YES Bank led to a sharp 28.7 per cent fall in the stock, on Friday. While this looks like an attractive entry point, investors ought to await clarity regarding the successor to Rana Kapoor. There are multiple worries, which could hurt YES Bank’s near-term earnings potential, weighing on its return on equity (RoE).

The first is on capital to fund growth plans. YES Bank’s loan book has grown 42.4 per cent annually over the past two years. This led to moderation in capital levels of the bank, with the CET-1 ratio declining 170 basis points over FY18 to 9.7 per cent, and then to 9.5 per cent as of June 2018.

Its total capital ratio, too, fell to 17.3 per cent as of June 2018, from 18.4 per cent as of March 2018. Analysts at Motilal Oswal Securities said capital-raising may get delayed due to the pending management transition, adversely impacting near-term growth ambitions of YES Bank.

Further, credit cost (provisioning as a percentage of average loans) of the bank could also increase with a change in management. Analysts at ICICI Securities believe a change in leadership entails the risk of balance sheet clean-up, which will impact profitability.

YES Bank, in Q2FY18, had upgraded Rs 47.1 billion (or 74 per cent) of the divergent accounts as of March 2017, amounting to Rs 63.6 billion based on the RBI’s asset quality review. According to analysts, these upgraded divergent accounts may get re-recognised as non-performing assets (NPAs) or bad loans, and the bank may have to take a hit (if the RBI’s asset quality review report for FY18 is adverse) — leading to a rise in NPAs.

This will lead to a fall in the bottom line of the bank, and (along with the impact on loan book growth) will restrict a rise in net interest income, or a difference between the interest earned and expensed.  Analysts at IDFC Securities expect RoE to fall to below 14 per cent from 18 per cent at present.