Q1 Comment. YES Bank: Higher slippages, slowdown in loan growth weigh on performance

The worst may not be over yet for YES Bank, if the latest June quarter results are any indication.

Significant rise in slippages, low provision cover and addition to the stressed accounts as identified in the March quarter suggest that earnings could continue to be under pressure in the coming quarters.

With muted growth in core net interest income and sharp rise in provisioning, YES Bank’s profit for the June quarter is less than one-tenth of that reported during the same quarter last year.

Also, the probe of a whistle-blower complaint alleging irregularities in operations, potential conflicts of interest in relation to the former MD and CEO Rana Kapoor, and allegation of incorrect classification of bad loans, is ongoing.

The implications of this in FY20 is awaited.

Asset quality woes had come back to haunt the bank in the March quarter, resulting in higher provisioning and loss.

More slippages

As such, slippages for YES Bank have been steadily moving up since March quarter last year — from ₹560 crore in the June 2018 quarter, slippages had shot up to ₹1,631 crore in the September quarter. In the December quarter, overall slippages were higher at ₹2,297 crore, which included ₹1,913 crore of slippages on account of the bank’s exposure to IL&FS.

In the March 2019 quarter, aside from slippages of ₹552 crore on account of an airline company (presumably Jet Airways) and ₹529 crore in relation to an infrastructure conglomerate (IL&FS), slippages were elevated (overall slippage of ₹3,481 crore). In the latest June quarter, gross slippages stood at a higher ₹6,232 crore. That the corporate slippages were entirely from the stressed accounts already identified by the bank in the March quarter, offers some comfort — of no negative surprises. But, there are other aspects that are of concern.

YES Bank had identified ₹10,000 crore of stressed accounts in real estate, media and entertainment and infrastructure sectors in the March quarter. It made a contingent provisioning of ₹2,100 crore (about 20 per cent) on these accounts; in the June quarter, the bank has used up ₹1,399 crore of this pool for NPA provisioning, cushioning the impact of higher slippages to some extent.

But the stressed accounts have increased in the June quarter to ₹29,470 crore (mainly on account of rating downgrades of investments in two financial services companies). This could lead to increase in provisioning in the coming quarters.

As such, provision coverage has been significantly slipping over the past three fiscals (60-70 per cent in FY15 and FY16) to about 43 per cent in the latest June quarter. Hence, sharp slippages can impact earnings substantially.

Muted earnings

Reversal in interest income on account of rise in bad loans has impacted YES Bank’s core performance in the latest June quarter. Accordingly, loan growth has sharply slowed down over the past two quarters (from 30-50 per cent growth over the past two to three fiscals). In the June quarter, loan growth stood at 10 per cent (down from 18.7 per cent in the March quarter). The management’s calibrated growth strategy could impact earnings, going forward.

While provisioning for the June quarter is lower than that in the March quarter, they are still elevated and have increased 185 per cent YoY to ₹1,784 crore in the June quarter. This includes ₹1,109 crore of mark-to-market provisioning led by rating downgrades of investments.

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