Despite Recent Hiccups,Say 'Yes' To This Bank

Kiran Dhawale

The fourth largest private bank in India, Yes Bank caters to the 'sunrise sectors' of India and has evolved into a full service commercial bank fulfilling the requirements of corporate, MSME and retail customers. It operates in the verticals of corporate and institutional banking, investment and merchant banking, corporate finance, branch, business and transaction banking, wealth management and brokerage businesses. Its footprint covers all 29 states and Union territories. The bank boasts 1100 branches and 1724 ATMs. 


Technology shaping the banking industry 

The banking sector is evolving rapidly into a tech-driven industry. Yes Bank has jumped onto the bandwagon of digital transformation and is the first bank in India to successfully implement innovation in supply chain finance with the help of Blockchain and API (Application Program Interface) banking. Right from launching chatbots for customer connect and implementing UPI for facilitating digital payments to deploying robots in its offices, Yes Bank has established itself in the fintech sphere. 

The policy decisions taken by the Government of India caused the economy to gain momentum since 2017. However, the growth in the banking sector depends heavily on the domestic response to interest rates and overcoming the restrictions imposed by the government, which could hinder efforts to convert global trade constraints into sectoral opportunities. The overall economy is positioned to benefit because of reforms such as Jan Dhan, Aadhaar, PAN and GST. These reforms have benefitted the banking sector by positively impacting the working capital cycle, asset management, and payables and receivables scenario. 

However, it would be prudent to delve deeper into the sectoral nitty-gritties and identify challenges that could curtail the banking sector’s performance. The ever-evolving consumer dynamics is forcing banks to remain on their toes as customers are seeking more on-the-go services and demanding a multi-channel experience. With the competition rising, banks are forever occupied with discovering cost-effective ways of mitigating the risks on investments in a progressively capricious economic environment. Customer retention remains a chief concern as more and more banks are cropping up with inventive offerings that ensure considerable value addition. The best way to remain relevant in this sphere is to employ Artificial Intelligence (AI) to interact with customers and supply information even in the dead of the night. Most banks are dedicated to developing intelligent virtual assistants to perform unconventional tasks such as envisaging the future requirements of the customer. Thus, it is crucial for banks to cultivate predictive and analytical tools to help them withstand the steadily rising competition. Banks can no longer remain complacent if their sales are high; they need to keep abreast of the developments in the fintech ecosystem and incorporate a more customercentric approach in their business strategy. They need to collaborate with technology vendors and platforms to orchestrate an impressive business impact. Banks have to also deal with the problem of diverging regulations as they cater to different markets. They need to align regulatory compliance with business strategy to ensure both adherence and superior performance. Another primary issue associated with banks is the ever-imminent cyber risk. As banks are rapidly becoming technology-driven, their exposure to cyber risk is increasing correspondingly. This engenders particular alarm in the minds of investors as they are wary of the increased vulnerability. Most investors are not conversant with sophisticated technology, thereby making it difficult for them to quantify the level of risk they are taking by availing the bank’s services. Banks are continuously grappling with the dilemma of whether to replicate the customer experience offered by fintechs by developing equally innovative solutions of their own or to become more symbiotic and less competitive. 

Financials of Yes Bank and core competencies

Despite the challenges, the management has not identified any adverse impact on the overall business. In fact, the unaudited Q2FY19 performance which the company disclosed in a press release has been on track. The deposits surged 41 per cent YoY and stood at Rs 2.23 lakh crore as on Q2FY19. CASA ratio stood at 33.8 per cent. The loans and advances recorded a jump of 61.5 per cent and amounted to Rs 2.40 lakh crore in Q2FY19, of which the domestic advances amounted to Rs 2.20 lakh crore. Furthermore, the management has guided for stable asset quality and credit cost trend. This can be seen in the company’s gross NPAs of 1.35 per cent (% of gross advances) as on Q2FY19. It has also recapitulated its earlier credit cost guidance of 50-70 bps for FY19. The company has a comfortable liquidity position as demonstrated by its liquidity coverage ratio (LCR) of 101 per cent as on Q2FY19, which is higher than the minimum regulatory requirement of 90 per cent. The bank also reported a healthy daily LCR of 100 per cent for Q2FY19. The RBI measures to ease systemic liquidity w.e.f October 1, 2018 bode well for the bank as it is likely to release Rs 600 crore of funds for Yes Bank. This will further strengthen the company’s LCR ratio by another 11 per cent to 112 per cent. 

Yes Bank suffered a setback as its Common Equity Tier-1 (CET-1) ratio declined by 170 bps over FY18 to 9.7 per cent (9.5 per cent in Q1FY19). The CET-1 is a component of Tier-1 capital comprising the common stock held by banks. It sheds light on the capital adequacy as it compares the bank’s assets with its capital to gauge if the bank can withstand a financial crisis. By 2019, all banks are expected to meet a minimum CET-1 ratio of 4.50 per cent. Yes Bank initially planned to raise capital over the course of the next one year. However, the current share price and the impending management transition could delay this motive, thereby hindering near-term growth. Nevertheless, the strong internal accruals (average ROEs of 19-20 per cent) will lead to industry-leading growth. 

On the quarterly financial front, the bank's revenue increased 14.54 per cent to Rs 6,578.04 crore in Q1FY19 from Rs 5,742.98 crore in Q4FY18. The PBDT increased 14.95 per cent to Rs 2,454.71 crore in Q1FY19 from Rs 2,135.43 crore in Q4FY18. The net profit increased to Rs 1,260.36 crore in Q1FY19 from Rs 1,179.44 crore in Q4FY18, registering an increase of 6.86 per cent. 

The bank's financials present a healthy picture. Its total assets increased to Rs 3,12,446 crore in FY18 versus Rs 215,060 in FY17, posting a growth of 45.28 per cent. Its deposits surged by a whopping 40.50 per cent to Rs 2,00,738 crore in FY18 versus Rs 1,42,874 crore in FY17. Shareholders’ funds increased 16.79 per cent to Rs 25,758 crore in FY18 from Rs 22,054 crore in FY17. CASA ratio improved marginally to 36.5 per cent in FY18 versus 36.3 per cent in FY17. The advances increased to Rs 2,03,534 crore in FY18 from Rs 1,32,263 crore in FY17, 

registering an increase of 53.88 per cent. The capital adequacy ratio (CAR) increased to 18.4 per cent in FY18 from 17 per cent in FY17. Its net NPAs decreased to 0.64 per cent in FY18 from 0.81 per cent in FY17. Although the return on assets decreased to 1.6 per cent in FY18 from 1.8 per cent in FY17, it has consistently remained more than 1.5 per cent for the past five years. The return on equity (ROE) dropped to 17.7 per cent in FY18 from 21.5 per cent in FY17. The cost to income ratio stood at 40.2 per cent in FY18 as against 41.4 per cent in FY17. The basic earnings per share (EPS) increased to Rs 18.4 in FY18 versus Rs 15.8 in FY17. 

An analysis of the YoY annual performance reveals a growth of 23.40 per cent in revenue (interest earned) of Rs 20,268.60 crore in FY18 from Rs 16,424.99 crore in FY17. Its net profit increased to Rs 4,233.21 crore in FY18 from Rs 3,339.89 crore in FY17, registering a growth of 26.74 per cent. 

Challenges 

Although the overall economy has gained momentum, the upcoming state and general elections could create an uncertain political environment. The potential global trade war led by the US and China, hardening of international crude oil prices and withdrawal of monetary accommodation by major central banks across the globe could influence global demand, inflation, liquidity and volatility in financial markets. These risks have already caused domestic interest rates to firm up. The risks specific to the bank include thin capital position (CET 1:9.5%), no visibility on top management continuity and difficulty raising fresh equity. Investors who are contemplating purchasing the stock of Yes Bank need to be cautious about the potential downside risks associated with top management stability, shrinking NIMs, higher stressed assets, failure to curb capital consumption and slowdown of the retail franchise. 

Growth Drivers

Despite these risks, the bank is looking at encouraging prospects ahead. Issues pertaining to NPAs and stressed assets are getting resolved under the Insolvency and Bankruptcy Code (IBC) framework. Moreover, Yes Bank guided for 20-25 per cent loan growth in Q3FY19. In the last nine months, Yes Bank sold Rs 20,000 crore of loans and has a robust pipeline of Rs 10,000-15,000 crore of loans to sell down. Recently, Yes Bank got empanelment with the NSE as a clearing bank, which will pave the way for numerous business opportunities with the brokers of NSE 

Recent events at Yes Bank 

Recently, Yes Bank invited RBI’s scrutiny as the central bank uncovered issues pertaining to the bank’s books of accounts. The NPA divergence has been a major concern for the RBI, not just pertaining to Yes Bank, but all banks in general. Moreover, Rana Kapoor holds a majority stake in the company, which could pose a conflict of interest. The company has embarked on a search for a suitable successor and is evaluating both internal and external candidates for the same. The bank has appealed for an extension of Rana’s term as it believes this will aid in a smooth changeover. Additionally, with a view of ensuring long-term succession, the board has made a proposal to the RBI to appoint two senior leaders of the bank – Rajat Monga and Pralay Mondal –as the executive directors. 

Conclusion and Recommendation 

It is inevitable that the near term uncertainty will prevail as the bank focuses on capital preservation until the new management assumes control and articulates a fresh business strategy. Nevertheless, the sharp correction has left the stock trading at reasonable valuations. The bank has consistently paid dividends owing to robust profitability figures, while also retaining enough earnings to maintain good capital adequacy ratio (CAR) to fund future growth. The company has not only survived the challenges in the light of recent developments, but also demonstrated sound financial performance. The dividends, EPS, NIM, CASA ratio and net profits have increased consistently since FY2012. By virtue of these factors, we recommend our reader-investors to BUY the stock

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