Yes Bank Share price: Investec reduces book value per share by 3%, target price to Rs19 (from Rs 20)

FY22e looks uncertain due to economic stress, Yes Bank reported standstill and SMA2 numbers which are in line with our previous expectations of 6% slippages and 5% restructuring to fully account for the legacy and covid related stress. However, in addition to this, Yes Bank reported SMA1 of 5.7% (excl restructuring including above) which is inline with the system average and similar to peer banks (3-5% range).

Given the uncertain economic conditions, Investec build elevated slippages and credit costs even for FY22e to absorb this stress. Operational performance both on operating profitability and deposits mobilization remain strong, while the positive “one-offs” of recoveries & treasury income are higher than negative “one-offs” of interest reversals. Investec reduces book value per share by 3% and target price to Rs19 (from Rs20) and retain Hold.

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Several one-offs in PPoP:

Yes Bank reported PPoP of Rs 23 bn which include two one-offs

(a) recovery income of Rs 12.3 bn
(b) treasury gains of Rs 5.4 bn

However, the bank has not considered interest reversals to the tune of Rs 8 bn because of which both NIMs and PPoP performance seems strong. Because of the higher slippages Rs 100- 110 bn next quarter to absorb stress, Operating profit might drop due to interest reversals. However, post this the banks’ core PPoP should revert to the normalized level of Rs 13- 14 bn.

SMA 1 disclosure leads to uncertainty for FY22e:

Yes Bank’s disclosures on both the standstill and SMA2 broadly led to the 6% slippage and 5% restructuring outcome for Q4 '21e. However, they have also disclosed an additional 5.7% of book as SMA1 which is in line with the pre-covid level and likely to be in line with peer bank average as per our expectations. Nevertheless, the economic uncertainty forces us to build elevated credit costs of 3% to factor the uncertainty created by SMA1 book.

Sufficiently capitalized but profitability uncertain; retain hold:

Investec believes the bank’s CET1 should remain above 12% even if the entire stress were to be absorbed over the next 5 quarters. Liabilities continue to improve continuously with CD ratio now at 116% and deposit growth strong at 7.7% QoQ. While the balance sheet remains stable, profitability will take time to improve as we continue to build higher credit costs due to economic uncertainty. Investec reduces book value per share by 3% and target price to Rs19 (from Rs 20) to factor in higher credit costs in FY22e. Retain Hold on Yes Bank.