Bolstered by the capital raised (nearly ₹15,000 crore) through the further public offering (FPO) in July, YES Bank has certainly eased concerns on the bank’s ability to continue as a going concern, with key capital and liquidity ratios (which were in breach in the March quarter) moving above the RBI’s regulatory requirement. But even as the bank’s earnings have moved into the black over the past two quarters and asset quality has remained stable, there are several risks that need a close watch. As such, most metrics indicate a long road to recovery for the beleaguered bank.

In the latest September quarter, YES Bank reported a profit of ₹129 croreagainst a profit of ₹45 crore in the June quarter. A marginal improvement in core net interest income (3 per cent sequential growth) and fall in operating expenses (by 4.5 per cent QoQ) have aided earnings. Gross NPAs remained stable at ₹32,344 crore in the September quarter (₹32,703 crore in the June quarter). Advances saw a slight uptick (1.5 per cent QoQ), while deposits have grown 15 per cent sequentially. The bank’s Tier I capital ratio stood at 13.6 per cent (above the regulatory requirement of 8.875 per cent) thanks to the capital infusion through the FPO. Liquidity coverage ratio, too, has moved up to 107 per cent from about 40 per cent in the March quarter.

While these are positive trends, persisting risks to earnings and capital in the coming quarterswill keep investor interest tepid in the stock. Remember the stock continues to trade at the FPO price of ₹ 13 per share (fixed at nearly half the market price then in July).

Risks to earnings

First, while the bank’s bad loans remained stable in the September quarter, this has been mainly due to asset classification standstill. Accounts not declared as NPAs till August 31cannot be declared as NPAs until further order by the Supreme Court (interest waiver matter pending). The bank has stated that accounts amounting to ₹2,391 crore have not been classified as NPAs due to the SC order; overdue exposure greater than 30 days amounts to ₹6,716 crore. Hence, increase in slippages can to lead significant rise in provisions in the coming quarters, eating into earnings and capital. YES Bank’s concentrated exposures – in breach of exposure limits with respect to five groups as per FPO document – would need a watch.

The bank has, however, made Covid-related provisions of ₹1,918 crore, which can help cushion the blow somewhat.

The bank’s core earnings remaining muted in the near term could further add pressure to the overall profit. While net interest income improved sequentially in the September quarter, it is down nearly 10 per cent YoY, owing to the 25 per cent contraction in advances. This indicates the growth challenge for the bank in the near term.

Though deposits have seen 29 per cent growth over the past six months, it has been mainly driven by growth in corporate term deposits and CDs. Low-cost CASA deposits are about half the levels in September last year. Since the December 2019 quarter, the bank had seen a massive outflows of deposits – ₹72,000 crore until March 5 this year – when moratorium on deposits was placed. Ensuring steady deposit flows will remain a challenge for the bank.

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