There are a lot of creases to be seen in Yes Bank’s financials even as the analyst community looks the other way.
DNA dissected the bank’s financials to find warts that have not yet been put under focus lights.
These include:
1. Yes Bank’s exposure to Deccan Chargers, the Indian Premier League team that’s in the doldrums, is about Rs340 crore, which is a significant near-1% of its loan book.
IMPLICATION: If this turns bad, it will become a non-performing asset (NPA) and increase the bank’s provision expenses, thereby affecting profitability. The gross and net NPAs of the bank have been on the lower side, so the impact on profit growth will be high.
2. Despite a sluggish growth in the last fiscal, the bank’s yield on advances improved from 10.6% in fiscal 2011 to 12.21% in the following one due to an increase in share of “other loans” — which increased from 12% of the loan book to 18.2% of the loan book. This, even as the share of corporate loan book has been declining from as high as 70% in the second quarter of fiscal 2007 to 60% in the last fiscal.
IMPLICATION: Decline in corporate loan growth doesn’t give long-term visibility in the loan book of a bank. Generally, the corporate book also helps in driving higher fee income and thereby a healthy total income for a bank. But the bank has increased exposure in other loans which has not been defined (the break-up and details are not given). These other loans have driven up the yield, which will obviously take a toll on its capital adequacy ratio.
3. More worrying has been the fact that net interest margins for the last three years have been declining — from 2.79% in fiscal 2010 to 2.56% in fiscal 2012.
IMPLICATION: Despite increase in its yields, Yes Bank has been facing pressure on its margins. The bank’s share of total retail depositors is less. Moreover, it has been increasing its CASA deposits on the savings account side, which is coming at 7% interest, while a majority of rival banks offer 4% interest rate. This will continue to keep the cost of deposits slightly on the higher side. In a falling interest rate scenario, net interest margin improvement for Yes Bank looks tougher as it will have to cut down interest rates on advances to sustain a healthy credit growth, while peers have been cutting down deposit rates.
4. So what was helping the bank’s profit growth? It was other income. In the first quarter of this fiscal, other income grew by an astounding 75%, helping profit take a 34%year on year leap.
IMPLICATION: Shorn of that number, the bottomline would have been more or less flat.
5. Return on assets, or RoA, has been declining while higher leveraging has been aiding the growth in return on equity, or RoE. This indicates that the bank’s profit growth isn’t aiding the healthy return ratios but on the contrary, it is higher leveraging that is helping it sustain healthy RoEs. Yes Bank’s RoA has declined from 1.61% in fiscal 2010 to 1.47% in the last, while RoE has improved from 20.3% to 23.1% in the period.
IMPLICATION: Higher leverage impact will be that any capital infusion will mean an immediate hit on the RoE of the bank as the RoA has been declining and decrease in leverage will dent its RoE. The bank has been utilising its networth (equity plus reserves) to increase leverage and improve RoE and its profit growth has not been aiding improvement in return ratios, so it will need further capital (to sustain higher leverage) from time to time, which, in turn, may take toll on its return ratios
6. The leverage of the bank is the highest compared with other private banks. It stands at around 16 times, compared with 8-9 times for ICICI Bank, 13 times for HDFC Bank and 11-12 times for IndusInd.
IMPLICATION: Asset-liability mismatches could become material going forward, if they are not reined in right now.
7. The bank’s risk-weighted assets to advances are also on the higher side compared with peers. These stood at around 136% compared with a 60-90% range that’s the norm in India’s banking industry.
IMPLICATION: Higher RWA (risk weighted assets) means the bank is carrying riskier assets in its portfolio and requires higher capital to sustain its portfolio. This can be on account of the high non-funding exposure that the bank has and the increase in other loans may have required higher capital. The loans carrying higher RWA means they are riskier and the default in payments from them stand on the higher side.
8. The biggest concern about Yes Bank is its non-fund based exposure. If we compare non-fund-based to fund-based ratio, Yes Bank has huge exposure in some stressed sectors such as iron & steel, electricity, gems & jewellery, construction, petroleum, automobiles and other industries. We feel that some of the sectors like construction, gems & jewellery, other industries, iron & steel and electricity might give some hiccups. Usually, the non-fund based exposure is given at a higher rate, which results in better yields
IMPLICATION: This could potentially lead to a dramatic rise in non-performing assets or bad loans in a relatively short period of time.Turn to Page 14
9. The bank’s cost to income ratio has been increasing over the last few years. It has risen from 36.4% in fiscal 2011 to 37.7% in the last one and 39.5% in the first quarter of the current year.
IMPLICATION: This reflects poor operational efficiency and further increase in branch network would hurt their profitability as it would further increase the cost to income ratio.
10. The bank has been able to improve its Casa, ratio, but the fact of the matter is that the deposit cost would still increase because it is garnering savings accounts at a steep 7%.
IMPLICATION: That would take away a lot of gains on the margins’ front as the incremental cost of garnering savings accounts is on the higher side.