Why YES Bank is still not out of the woods

While the ongoing stress in certain companies to which YES Bank has exposure was expected to weigh on the bank’s earnings, the lender’s latest September quarter results have only accentuated investor concerns. The bank reported sharp rise in bad loan book in the September quarter, leading to dismal earnings performance.

But what is more concerning is the fact that of the ₹5,945 crore of slippages during the quarter, ₹3,730 crore came from within the stressed book (BB and below-rated book) and about ₹2,220 crore from outside the bank’s stressed book, mainly from SME and retail. This indicates that there could be more pain for the bank, coming from outside the identified stressed pool in the coming quarters, which is a cause for worry. As such, YES Bank’s stressed asset pool inching up in the September quarterlends little comfort.

On the core operational front, the management’s calibrated growth strategy to conserve capital has also hurt earnings. The bank’s loan book shrunk by 6 per cent during the September quarter, leading to a near 10 per cent drop in core net interest income, which was also impacted by the sharp rise in slippages (reversal in interest income).

YES Bank reported a loss of ₹600 crore in the September quarter, owing to weak core performance and a one-time impact on deferred tax assets (DTA) write-off of ₹709 crore. Even excluding this impact, the net profit at ₹109 crore is dismal for the once-fancied private lender.

More stress?

YES Bank has predominantly been a corporate lender, with over 60 per cent of its total loans pertaining to the corporate segment. The bank had identified ₹10,000 crore of stressed accounts in real estate, media and entertainment, and infrastructure sectors in the March quarter. But the stressed pool has steadily increased since then. In the June quarter, the stressed book stood at ₹29,470 crore, which has further increased to ₹31,400 crore in the latest September quarter.

What is of concern is the fact that the management had earlier stated that a chunk (70-80 per cent) of the bank’s stressed book pertained to four or five stressed accounts — DHFL, IL&FS, Essel, ADAG, and CG Power. Hence, the ₹5,230-crore fresh addition to the stressed asset pool in the September quarter, is a cause for worry.

In the March 2019 quarter, the bank had created a contingent provisioning of ₹2,100 crore towards the identified stressed accounts. Of this, the bank has used up ₹1,399 crore in the June quarter, and the balance in the latest September quarter. Despite this, the bank’s provisioning remained elevated at ₹1,336 crore in the September quarter.

With the contingent provisioning buffer used up, earnings could get impacted in the coming quarters. The bank’s provision cover is low at about 43 per cent and sharp rise in slippages can erode earnings.

Growth concerns

This throws up concerns on the capital front. Aided by a ₹1,900-crore capital-raising through QIP, the bank has been able to increase its CET 1 ratio (common equity tier-1) to 8.7 per cent in the September quarter, from 8 per cent in June quarter (regulatory requirement at 7.375 per cent). The bank has been consolidating its loan book to ease up capital. But this could only hurt earnings and capital further.

From stellar 30-50 per cent growth in loans in the past, YES Bank’s loan growth has taken a big hit in the past few quarters. After reporting a muted 10 per cent growth in June quarter, the bank has seen its loan book shrink by 6 per cent in the latest September quarter, led by 15 per cent decline in corporate loans. A weak capital can continue to impact YES Bank’s credit growth, unless there is quick resolution of stressed accounts.

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