YES BANK’S Q3FY21 earnings aggravate fears about its asset quality issues. The portfolio vulnerability becomes visible from, a spike in standstill non-performing loans or NPLs (from 1.5% to 5%), SMA-2 pool(from 2.4% to 4%), SMA-1 (from 1.6% to 7.3), and additional restructuring outside of this pool at 3.2% over and above the labelled non-performing assets at 22%.
We revise estimate of cumulative slippage run-rate to >13% (earlier 10%) and cumulative credit cost to 6% (5%) over FY21E/FY22E. Elevated credit cost offsets operating metrics improvement, leading to earnings cut. The quarter had positive surprises in the form of new CASA accounts (220k added in Q3FY21), retail +SME disbursements outpacing the set target (of`12,000 crore), retail fee traction (up 38% QoQ ), cash recoveries of Rs 1,500 crore, treasury profit of Rs 540 crore, and cost containment(down 8% QoQ ).
However, asset quality fears outweigh the turn around in operating metrics and we expect the recently proposed equity raise to depress RoE. Maintain hold with a revised target price (TP) of Rs 16 (earlier Rs 17). Asset quality issues leading to further capital erosion, lock-in of shares and lower float boosting stock value beyond fundamentals remain key risks.
Asset quality concerns merely being deferred and seem far from over, Yes Bank’s stress pool aggravate fears around its asset quality. Portfolio vulnerability becomes visible from, spike in standstill NPLs to 5% (restructuring invoked – 15% of this pool), SMA-2 at 4% (restructuring invoked – 47%), SMA-1 at 7% (20% restructuring invoked); additional restructuring executed at 2.5% plus restructuring invocation of 0.7% (outside of standstill, SMA-1/2 pool); labelled non-performing assets at 22%.
We, therefore, estimated cumulative slippage run-rate of >13% and cumulative credit cost of >6% over FY21E/FY22E and expect depressed earnings. Collection efficiency still lagging in SME and corporate segments, collection efficiency in retail improved to 96% (from 89% in Sept) against 97% pre-Covid. However, MSME collection efficiency still lags at 94% of pre-Covid era.
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