Yes Bank share price: Challenges, Valuations, Concerns - Kotak Institutional Equities decodes result numbers for investors to benefit

Kotak says key challenge for Yes Bank would be to convince investors once asset quality issues have been addressed.

Kotak Institutional Equities believes NPL pains will continue in Yes Bank: Reuters

Kotak Institutional Equities maintain sell rating, revise Face value to Rs 11 from Rs 10 earlier. Net Interest Margins expanded 10 bps QoQ while non-interest income saw strong contribution from non corporate fee income. Kotak says key challenge for Yes Bank would be to convince investors once asset quality issues have been addressed. Confidence in building an earnings trajectory is yet to emerge because the provisions required for bad loans are not easy to forecast today. Kotak Institutional Equities believes NPL pains will continue in Yes Bank; progress is being made elsewhere within the Bank.

Quick Glance at Yes Bank Numbers:

Net Interest Income for Yes Bank is down 10% YoY; Profit after tax stood at Rs 1.3 bn, Gross non-performing loan down 40 bps QoQ to 16.9%; Net non-performing loan down 30 bps QoQ to 4.7%. Provision coverage remains stable.

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Kotak Institutional Equities believes NPL pains will continue in Yes Bank; progress is being made elsewhere within the Bank.

Two distinct trends emerged this quarter:

(1) The quantum of unrecognized bad loans is high and would steadily unfold over the next few quarters
(2) The bank has adequate capital to withstand this. However, Kotak Insti sees the bank’s progress on rebuilding its liability profile and shift in focus to retail / SME. Near term earnings remain weak and unpredictable. Given near term challenges and a relatively unfavourable valuation, Kotak Insti maintains a sell rating on Yes Bank.

Marginal profit print not too significant; recovery in business momentum a positive

Yes Bank reported a marginal profit on the back of 7% YoY decline in operating profits. Revenues declined 15% YoY while NII declined 10% YoY for a 25% YoY decline in loans.

While the focus was primarily on asset quality, Kotak Insti sees the following as key positives for Q2 FY21:

(1) Net Interest Margins expanded 10 bps QoQ while non-interest income saw strong contribution from non corporate fee income.
(2) The loan book saw a gradual shift away to retail / SME led by high disbursements.
(3) Strong improvement in its liability profile since the moratorium was lifted on the bank with solid recovery in term deposits and healthy growth in current and savings deposits.
(4) Steady improvement in cost income ratio as costs declined 20% YoY. On the negative side, there were no NPLs recognized this quarter. The unrecognized stress is high at 6% of loans (including those which could have slipped this quarter).

A series of steps needed to achieve transformation; not an easy recovery

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A key challenge for Yes Bank would be to convince investors once asset quality issues have been addressed. If the economic backdrop improves, the transition would probably be easier. However, it is quite likely to have a higher share of less than confident investors. It is hard to convince investors for a turnaround bank till most of the issues have been sorted out. This would be normalization of earnings, RoE profile, strong liability profile, a diversified book and a stable management. Usually, execution of these changes takes a long time as there could be several unforeseeable challenges even if the management is executing earnestly. As noted earlier, successes usually evoke faint appreciation while missteps are magnified resulting in much slower expansion in multiples.

Valuation remain a concern

Kotak Insti have revised earnings upwards primarily on account of

(1) better than expected recovery in the liability profile
(2) Slower than expected slowdown in loan growth
(3) Recovery in fee income
(4) Lower provisions

Kotak Insti values the bank at 1X book for RoEs which are likely to remain quite weak in the medium term while the bank is making changes to its business model. Confidence in building an earnings trajectory is yet to emerge because the provisions required for bad loans are not easy to forecast today. Given the relatively rich valuations for Yes Bank despite the near term uncertainty.

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