Regaining investors confidence remains an uphill task for YES Bank

Asset quality still an unconvincing weak patch; quality of deposit growth also needs monitoring

YES Bank published its July-September quarter (second quarter, or Q2) results last Friday. In anticipation of an improved performance, its stock was locked in the upper circuit, with gains of 5 per cent. While Monday’s weak market conditions were a drag on its stock, the critical aspect to acknowledge is that despite two successive quarters of net profit (Rs 129 crore in Q2 bettering first quarter’s, or Q1’s, performance), analysts are in no hurry to reconsider their stance on the lender.

ICICI Securities was an exception to resume coverage with a ‘hold’ rating, though a majority remains negative on the stock.

The Street’s apprehension stems from YES Bank’s asset quality. The bank reported slippages of Rs 100 crore in Q2, thanks to the Supreme Court’s (SC’s) order on recognising non-performing assets. But for this, YES Bank would have recognised Rs 2,390 crore as slippages. Loans due over 60 days stood at Rs 4,060 crore and those due over 30 days at Rs 9,100 crore.

“We would have provided Rs 1,900 crore in Q2, against Rs 500 crore (if not for the SC’s stay),” says Prashant Kumar, managing director and chief executive officer, YES Bank.

The bank’s slippage guidance at 9 per cent remains unabated, indicating its watchfulness over stress accretion, beyond what has been earmarked to date. Provisioning cost may not ease, though at Rs 1,920 crore of Covid-19-related provisioning, Kotak Institutional Equities says this could cover loans overdue for 30 days and more.

Deposits growing at 16 per cent sequentially to Rs 1.36 trillion in Q2 was a positive, though the bulk remains accounted for by corporate deposits (share steady at 44 per cent). “We are enjoying better customer confidence on deposits now,” says Kumar. Whether this helps improve the bank’s retail appeal, despite offering the highest deposit rates among front line banks, needs to be seen.

What seems to be working in YES Bank’s favour is its efforts to build the retail business. Retail loan disbursement at Rs 3,760 crore in Q2 is an improvement from Rs 3,100 crore a year ago and Rs 400 crore in Q1. The bank targets Rs 6,000 crore and Rs 4,000 crore of loan disbursements to retail and small and medium enterprises in the third quarter. While corporate loans as a segment continues to account for 56 per cent of total loans, Kumar is clear that large-ticket loans to the infrastructure segment won’t be a priority just yet.

In all, ICICI Securities expects YES Bank to evolve as a me-too bank, with industry average business franchise and profile. “It becomes important to appraise its business positioning and how the shareholding structure will look three to five years down the line,” they note, adding that the limited free-float of shares may keep valuations bloated.