Spooked by guidance, brokerages say no to YES Bank

After YES Bank reported a Rs 1,506 crore loss for the March quarter last week, several brokerage firms including Axis Capital, Citi and Emkay downgraded the private sector lender, with Australia-based Macquarie cutting its target price by 40% as it double downgraded the stock to "underperform".

Macquarie drew upon the learnings from how Axis Bank handled its watch list disclosures and now built in a significantly more conservative slippage and credit cost estimate over FY20-22E, more than double the management's guidance, it said in a note.

"We must eat humble pie today and admit we underestimated risks in structured finance. We got the call wrong," Macquarie said. The brokerage has double downgraded the stock with 30% downside. It slashed the target price from Rs 270 to Rs 165, while the FY20-21E earnings per share have been cut by 45%. It had earlier given an "outperform" rating on the lender.

In its note, Macquarie said over the past eight years it has been "constructive on YES Bank's ability to not just survive, but to thrive in a risky business segment like structured finance".

"Despite our anxious scepticism at times, YES has built a track record of handling multiple challenging accounts well. RBI's (Reserve Bank of India's) clean chit in FY18 divergence audit seemed to ratify our understanding of the business model," the report said.

Macquarie said the bank's new CEO Ravneet Gill flagged large stressed pool, aggressive accounting practices and weakness in the retail franchise. "The new CEO's flag of a three times quarter-on-quarter increase in BB and below rated accounts, despite aggressive slippages (Rs 350 crore) in fourth quarter of fiscal 2019, comes as a material negative surprise. In addition, flagging off of aggressive accounting practices in fee income (Rs 300 crore reversal in fourth quarter) and weakness in retail franchise (only estimated 30% branches break even) further dampen our fundamental view on the robustness of the business model," the report said, adding that investors can target a 1% return on assets by FY22E.

YES Bank has reported a loss of Rs 1,506.6 crore in the March quarter compared to a profit of Rs 1,179.4 crore a year earlier. The bank made total non-tax provisions of Rs 3,661.7 crore as against Rs 399.6 crore reported during the same period last fiscal. Gross non-performing assets rose to 3.2% of outstanding from 1.28% in the corresponding period last year, possibly on the back of Jet Airways and IL&FS slippages, according to the report.

The YES Bank management has guided towards a watch-list of Rs 10,000 crore, 125 basis points credit costs in FY20 and a 20-25% loan growth led by retail and SME loans, while a 50% decline in corporate fee, Macquarie report further said.

Rana Kapoor, the former MD and CEO of YES Bank, was removed from his position by RBI earlier this year for reportedly under-reporting bad loans and for poor governance standards.

Other brokerages such as Axis Capital, BoB Capital, Citi, Edelweiss, Prabhudas Lilladher and Emkay Global have also revised their ratings to sell, neutral or hold.

YES Bank shares on Friday closed 0.13% lower at Rs 237.40 apiece. The stock has fallen 32.57% in the last one year.

CAUGHT UNAWARE

• The YES Bank management has guided towards a watch-list of Rs 10,000 crore
   
• Increase in BB and below rated accounts a negative surprise, said Macquarie