Stock strategy: YES Bank tanks 34% as RBI limits Rana Kapoor's tenure

Thus far in the calendar year 2018 (CY18), YES Bank has underperformed the markets by falling nearly 1.5 per cent, as compared to 0.5 per cent fall in the S&P BSE Sensex and the S&P BSE Bankex

Shares of YES Bank tanked 34 per cent in trade on Friday to hit an intra-day low of Rs 210 levels on the Bombay Stock Exchange (BSE), after the Reserve Bank of India (RBI) denied an extension to Rana Kapoor as the bank’s managing director and chief executive officer (CEO). The stock ended 29 per cent lower at Rs 227 levels.

Thus far in the calendar year 2018 (CY18), YES Bank has underperformed the markets by falling nearly 1.5 per cent (till Wednesday), as compared to 0.5 per cent fall in the S&P BSE Sensex and the S&P BSE Bankex – a gauge of performance of banking stocks on the BSE, ACE Equity data show.

So, should you ‘sell’ the stock given the uncertainty or does the fall present a good opportunity to buy? Here is a quick compilation of how leading brokerages and research houses have interpreted the development and their investing strategy.

JEFFERIES

We do not subscribe to the view that without Rana Kapoor there is no future for this systemically large bank, or that its financials have been cooked up. CET 1 is low but we do not see a material growth slowdown. More clarity is needed, and we do have questions, but we are not panicking. We lower our price target to Rs 365, based on the latest 10-year average P/B multiple.

EDELWEISS RESEARCH

The move creates uncertainty in the near term with respect to rationale for RBI’s reluctance, new leadership and capital-raising plan. In light of this adverse development, we are pruning the target P/B to 2.5x (from 3x FY20E earlier) and thus revising the target price to Rs 375 (from Rs 450). That said, we believe the bank has a strong foundation (with second line of business leaders in place), which the new leader would build on. Given Yes Bank’s franchise strength, it shall be able to sustain the superior RoE profile in our view; maintain ‘BUY’.

PHILLIP CAPITAL

Asset quality concerns are unwarranted. Higher divergence, in our view, does not necessarily mean high credit cost, as the bank has been able to recover (excluding sale to ARC) around 55 per cent of its non-performing assets (NPAs) over the last five years. We see YES' worst‐case credit cost at 70‐100bps, not too far from the management's credit‐cost guidance of 50‐70bps. Stability in the interest rate cycle will provide tailwinds to margin, although from FY20. Strong top-line growth coupled with operating leverage would enable YES Bank to post 29 per cent CAGR in profit after tax (PAT) over FY18‐21 and deliver around 19 per cent return on equity (RoE). Steady earnings trajectory (driven by market share gains) and unwarranted asset quality concerns make us believe that YES Bank provides a good long‐term investment opportunity.

IDFC SECURITIES

We are downgrading the stock to Underperformer from Neutral. The stock is a top BUY for many brokerages. So it appears that this risk has not been priced in by the street which means that there could be a significant correction in the stock price due to this event.

ANTIQUE STOCK BROKING

While it is undoubted that stock reaction would be negative, uncertainty is likely to loom large till there is clarity over the rationale of RBI not giving an extension and new leadership plan is presented. While an internal candidate may be looked at we are not too sure as to how will the RBI perceive it. In case of Axis Bank, a leader from outside was preferred. YES in times of uncertainty has traded at significantly low valuations of 0.5x Global Financial crisis and 1x in FY14 (exchange rate volatility and higher interest rate) and 1.5x at the time of asset quality review. We have not yet revised our earnings assumptions and keep the stock Under Review till clarity emerges.

ELARA CAPITAL

Considering the regulator's view on top management & board, the bank’s earnings and return ratios would not command similar multiples. And, now there exists a high probability of lesser earnings growth and lower return ratios. We determine YES Bank would deliver EPS growth of 7%/32% YoY and RoE at 16.4%/18.8% in FY19 and FY20 respectively. Our revised target price of Rs 380 at 2.7x FY20E ABV (from previous target price of Rs 500 at 3.3x FY20E).