Q1 results: YES Bank's investors stare at painful and uncertain days ahead

Another quarter of 'kitchen sinking' took away close to Rs 1,784 crore from the bank's operating profit pool, even as net profit at Rs 114 crore was better than steep losses in the previous quarter

Analysts have raised many concerns over YES Bank’s June quarter (Q1) results, published on Wednesday. For some, loan growth at a decade low of 10 per cent in Q1 and deposit growth at 6 per cent, were disappointing.
 
For the majority, though, the problem lay in the fact that asset quality remains far from comforting. Another quarter of ‘kitchen sinking’ took away close to Rs 1,784 crore from the bank’s operating profit pool, even as net profit at Rs 114 crore was better than the steep losses in the previous quarter. However, capital adequacy remains the larger concern.
 
The process of cleaning the books in Q1 came at a steep cost, with common equity tier 1 (CET-1) capital falling from 8.4 per cent in the March 2019 quarter to 8 per cent in the June quarter. At these levels, the capital available is just around the minimum regulatory threshold, pointing to the urgency in replenishing the same. At what cost it will flow into the bank, is equally important to be seen.
 
Fund raising could be challenging, given that business isn’t growing as it did in the past, for the private lender. Analysts say this could put the bank in a position to accept what it gets from potential investors.

After near-80 per cent price erosion in a year, valuations have melted 0.7 times its FY20 book, from three times the 1-year forward book value. Analysts warn that at these levels, additional capital could mean substantive dilution, particularly for minority shareholders.
 
“Even if it raises capital, it will be dilutive for existing investors and even if it raises $1 billion, the CET-1 will still be less than 11 per cent,” say analysts at Edelweiss Securities.
 
Meanwhile, doubts over asset quality are only compounding. Not all of the Rs 6,300 crore of slippages (fresh addition of bad loans) came from accounts classified under the watch list (loans identified as potential trouble). Slippages out of the identified watch list was only at Rs 2,500 crore, and to top it, the fresh addition of Rs 6,000 crore was made to the pool of below-investment grade assets. In fact, the watch list after Q1’s clean up remains at Rs 10,000 crore, indicating further addition to the list.
 
With these unsettling factors, Suresh Ganapathy of Macquarie Capital believes capital may come at Rs 100 a share as against the earlier estimate of Rs 200 a share.
 
Further, whether this infusion aids the 20 per cent growth targeted by the bank, needs to be seen. If it doesn’t, investors may have to brace for another round of fund infusion and more equity dilution. In short, YES Bank’s investors stare at painful and uncertain days ahead.