Existing book has been taken care of – Yes Bank

Update on the Indian Equity Market:

On Thursday Nifty closed +1.2% higher at 10.740. Among the sectoral indices, IT (+2.8%), Pharma (+1.7%), and Auto (+1.2%) closed higher. Media (-1.7%) was the only sector to close lower. Infosys (+9.5%), BPCL (+6.9%), and CIPLA (+5.6%) closed on a positive note. Bharti Infratel (-7.0%), TechM (-2.7%), and ITC (-2.4%) were among the top losers.

Excerpts from an interview of Mr Prashant Kumar, CEO, Yes Bank with ET dated 14^th July2020:

• His view on the current capital raise: the current CET (common equity Tier 1) is 6.3% and this capital raise will take it to 13% giving a buffer of 500 basis points over the regulatory requirement.
• This will also take care of the growth requirements for at least two years. Even after two years of growth CET would be around 12% to 13%.
• On usage of funds: the existing book has already been taken care of and the provision on account of future slippage will be taken care of by the pre-provisioning operating profit. So, this capital will not be used for any provisioning. In the worst-case scenario 100 basis points of capital may be used for provisions mainly due to Covid19.
• On the loan book post Covid-19: three sectors which have been impacted by coronavirus are hospitality, aviation and real estate. The bank is not seeing any recovery in these three sectors. Except these sectors, recovery is happening. Second, all term loans have been extended by 6 months.
• He expects things in these sectors to normalize within 2-3 months. The impact on book could be around Rs 10,000 crore, which could be at risk out of total book of Rs 1.71 lakh crore as of March 2020.
• On the liability side: there has been a net addition in deposits and in the last two months the bank has been able to reduce 100 basis points on saving bank rate and 50 basis points on term deposits, which is a good thing.
• The targeted CASA ratio is 40% in next three years from 27% in march20.
• On corporate lending: the bank will not do incremental lending on the corporate side at least during the current financial year, and repayments would reduce the corporate loan book. The bank expects corporate book to come down to 50% from 55% now and further to 40% in FY22.
• On Return on Assets (RoA) front: RoA is expected to be at 1% by 2023 through improved margins and also lower costs from our branch network, outsourced employees, vendor contracts, lease rentals.
• He says, rural and semi urban branches will be converted into business correspondent model and some 30 to 35 branches will be merged.
• On the retail side, the existing book is largely secured. Going forward, the bank will look at secured loans to salaried customers, equipment finance, vehicle finance, gold loans, two-wheeler finance. On MSME, the bank is present in the entire ecosystem of dealer financing but most of it is secured by collateral.
• Now the challenge is to generate profits. Deposit part has been taken care and the bank is moving towards profit direction. Once capital is there, it would be only to look at growth without having NPAs. The bank’s pre-provisioning profit is improving and when provisioning requirements lessen, there will be a net profit.
• On technology front, investments have been made. Even today the bank has 40% market share on UPI.

Consensus Estimate: (Source: market screener and Investing.com websites)

• The closing price of Yes bank was ₹ 19/- as of 16-July-2020.  It traded at 1.5x/ 0.5x the consensus Book value estimate of ₹ 12/32 for FY21E/ FY22E respectively.
• The consensus average target price for Yes Bank is ₹ 30/- which implies a PB multiple of 0.9x on FY22E BV of ₹32/-.

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