YES Bank Q1 review: Asset-quality risk, modest Covid provisions suggest risk to capital going ahead
With the recent ₹15,000-crore capital raise through its follow-on public offer (FPO), YES Bank has managed to shore up its capital ratios substantially in the June quarter. These ratios, along with the liquidity coverage ratio, had breached the regulatory requirement in the previous March quarter. The earnings for the bank, moving into the black after three quarters,may also offer optical relief.
But the latest June quarter performance does little to allay persisting concerns over the risk of deterioration in the bank’s asset quality, likely erosion in capital owing to rise in delinquencies in the coming quarters, and challenges to growth in advances and deposits. But for the capital infusion that has eased immediate concerns on the bank’s ability to continue as a going concern, YES Bank’s June quarter performance does not change the overall bleak prospects for the bank.
In the June quarter, YES Bank’s Tier I capital ratio stood at 13.5 per cent (above the regulatory requirement of 8.875 per cent), thanks to the recent capital infusion through the FPO. The other key concern on the bank’s liquidity ratio, whichhad slipped below regulatory norm owing to the massive deposit outflows, has also abated for now. YES Bank reported a 11 per cent sequential growth in total deposits in the June quarter, and its liquidity coverage ratio has moved up to 114 per cent from 37 per cent in the March quarter.
While these trends have eased ‘going concern’ uncertainties for now, future risk to capital and earnings persist. For one, while the bank’s bad loans remained stable at ₹32,703 crore in the June quarter (marginally down from March quarter), this has been mainly due to moratorium granted on various loans as per the RBI’s directive. In the March quarter, about 35 to 45 per cent of the bank’s loans were under moratorium. Details on this for the June quarter is still awaited. Even if there has been a decline in the loans under moratorium (as in other banks), it is still early to gauge the actual impact of this on asset quality. Slippages from these accounts (when the moratorium is lifted) could lead to increase in provisions in the coming quarters.
What could be of particular concern for YES Bank is the modest Covid-related provisions made by it. Against the NPA standstill accounts of ₹7,831 crore as of June (up from ₹2,713 crore), the bank has made ₹880 crore provisions (about 10 per cent as per the RBI requirement). These provisions are way modest when compared to the provisions made by other banks. This offers very little leeway to absorb losses in future and, hence, a sharp rise in delinquencies can erode capital and earnings significantly.
The other key risk for YES Bank is the sharp downgrades in the coming quarters, owing to the pandemic-led economic slowdown. The bank had SMA 1 book (where payments are overdue by 31to 60 days) of ₹10,781 crore as of March 2020. YES Bank’s concentrated exposures – in breach of exposure limits with respect to five groups as per FPO document – is an additional risk. The bank’s SMA/stressed book details for the June quarter are awaited.
Lastly, core earnings are likely to remain subdued in the near term.
While net interest income improved sequentially in the June quarter, it is down by a sharp 16 per cent y-oy, owing to 30 per cent contraction in advances. Even sequentially the bank’s advances have fallen 4 per cent. This indicates the growth challenge for the bank in the near term. YES Bank has been predominantly a corporate lender (corporate, medium and small/micro enterprises still about 77 per cent of its overall book). The new management expects to transition the loan mix in favour of retail and SME which could take time.
On the deposits front, while the bank has seen some sequential improvement, sustainability of the trend will be critical. This is because growth in deposits has been from corporate term deposits, current account and certificate of deposits. Savings deposits have continued to shrink (by 1 per cent q-o-q). The bank’s liquidity position will need a watch particularly after the short term special liquidity facility granted by the RBI comes to an end mid-September.