YES Bank: RBI's tightening overshadow strong Q1

High dependence on wholesale borrowing to put pressure on loan growth in coming quarters

The Reserve Bank of India (RBI)'s firefighting measures to save the rupee will have a direct bearing on the business prospects of YES Bank in the coming quarters. The bank's shares fell 12.6 per cent on Wednesday, even after it reported a 38 per cent year-on-year (y-o-y) increase in net profit, 39.6 per cent increase in net interest income and 24.3 per cent growth in advances. Analysts believe the liquidity squeeze and increase short-term rates will have a direct impact on the bank's growth and profitability.

RBI's tightening measures will impact the bank's loan growth, as it is reliant on wholesale funds as the low-cost current account savings account (Casa) deposits account for 20 per cent of deposits. Additionally, 43 per cent of the bank's deposits are in the range of three months to one year. From this month, RBI has put a cap on borrowing under the liquidity adjustment facility (LAF) window at 0.5 per cent of net demand and time liabilities (NDTL). YES Bank will be worst-hit by this, as it borrowed six per cent of its NDTL in FY13. The bank will have to de-leverage in the coming quarters and go slow on advances.

The increase in cost of funds will also have an impact on asset quality, if the bank passes on the increase in costs. In the first quarter of FY14, the bank's cost of funds declined 70 basis points in to 8.3 per cent. If cost of funds rise, then yields on assets would have to go up, too, from 12.8 per cent in Q1. At such high rates, the quality of borrowers would be compromised, believe analysts. Growing the loan book in these circumstances would be rather tough for YES Bank. Emkay Global has revised YES Bank's net interest income estimates downwards by seven per cent each for FY14/FY15. The brokerage also expects net interest margins, too, are expected to contract by 13 basis points over FY14 to 2.4 per cent before reversing back to 2.6 per cent levels in FY15.

In the coming quarters, the bank will not even have the cushion of treasury gains as bond yields have hardened and are not likely to ease soon. In the first quarter, the bank reported Rs 440 crore as other income, which is income from operations in the financial markets and financial advisory. Ishank Kumar, banking analyst at Religare Capital Markets, says: "Future profitability could be impacted due to sharp increase in short-term rates and rise in corporate bond yields." In the given circumstances, it will be imperative for the bank to raise capital.