Yes bank


Yes Bank Investor presentation and Research report from Motilal Oswal

Investor Presentation:
Motilal Research Report link:

Motilal Oswal Report highlights:


(Sarvesh Gupta) #267

Motilal reports are almost always over bullish on stocks under their coverage, so I won’t give any credence to their views.

Overall, it appears to be a big negative that divergence in NPA exists to the extent of almost a billion dollars for a bank which until very recently had a loan book in the vicinity of 10 billion dollars. Generally recent accounts don’t turn NPA so soon.

I would say the risk/reward in yes bank was always unfavourable for a long term stock investor although it turned out to be a great momentum stock and the same has turned negative now.

People who are looking at long term should also understand that the key man risk for this bank is the highest. Although highly paid the second rung management at yes bank hardly inspires any confidence if one goes by the concall.

(sreered) #268

As long as the research is done objectively, it should be ok. Why are you not saying the same about UBS report quoted by another boarder. Infact there are many others like Bank of America - Merrill Lynch report which said that this is a just a temporary blip and gave targets of 475 and Deutsche Bank gave target of 385 post Q2 results. So lets not discuss the credibility of individual brokerage houses here and restrict the discussion to the merits of the case.

Infact people said momentum turned negative even 2 quarters back but it has not happened and the stock surged to 1900 presplit. I feel there is a lack of clarity in RBI’s guidelines in treatment of NPAs (mind you - these are only guidelines and not rules). Even HDFC bank was asked to consider a big steel account as NPA, post its results (which it did not consider before)and they acknowledged it and that will be factored in soon (maybe in next quarter’s results)

(Chirag) #269

As a Yes Bank investor since 150 levels (split adjusted) here are my thoughts:

  • I always found the management of Yes Bank lead by Rana Kapoor a bit border line honest. I mean they are neither out right dishonest, nor in your face honest.
  • I mitigate this by not having Yes Bank more than 5-6% in my portfolio. I also keep equal amount of HDFC Bank in my portfolio. Fire & Water!

Coming to the issue at hand:

  • There is no doubt that in FY16, many banks including Yes were not honest enough to disclose their NPAs and provide for them.
  • In FY17, RBI started coming out with the “divergence” number to fix this situation.
  • Now it will be stupid of Yes Bank or any other bank to under-report numbers for FY18 as they know that RBI will come up with a divergence report.
  • The way I see it is, RBI has come up with a set of rules for classifying an asset as NPA. Starting FY18, is Yes Banks following those rules?
  • If they are not following them RBI will easily haul them and penalize them.
  • If they are following the rules, then I am not sure why people what a bank to report NPAs more aggressively?
  • Personally I think it will be stupid of banks to break the rules and have huge divergences for FY18.
  • As for reclassifying an old NPA asset as a standard asset in Q2, question is, was it re-classified as per rules? If yes, why are people complaining?
  • Somehow market thinks that companies that go over and above the call of duty in reporting NPAs are better than the one following the rules precisely.

Considering the good loan and NII growth, I am planning to hold on to my Yes Bank shares.

(vijay1994) #270

There must be a category of NPA where the bank and RBI mutually agree that they can expect repayment in the subsequent quarters.

This process of reporting an account as NPA in one quarter and recovering it fully in the next quarter is adding more confusion and volatility.

Disc : Invested from 120 levels (after split), forms 10% of portfolio.

(HG) #271

not interested nor invested

(Chirag) #272

From the article:

“Whether the corporate debtors that have suddenly resumed servicing their loans can sustain their repayments will only be known in 2018.”

(Yogesh Sane) #273

Since 2015, RBI has been in the process of bringing in much needed transparency in balance sheet of PSU banks so government can identify candidates for bailouts and consolidation. Although this exercise is meant for PSU banks, private sector banks are being dragged into RBI’s line of fire as it cannot have separate policies for PSU and private banks.

In the process, many private banks (Axis, ICICI, Yes and even HDFC to a small extent) had to classify certain assets as non-performing although by their own assessment it was performing. Now the question investors are asking themselves is which assessment they should trust? RBI’s or Bank’s?

A set of some 19 accounts is at the center of the issue. These belong to steel, power and infrastructure sector. Many large lenders have lent money to these accounts to varied extent. These are cyclical sectors where a prolonged downturn has caused distress among some borrowers although a chance of outright fraud cannot be ruled out.

RBI identified 6355 Cr of under reporting in case of Yes Bank. Out of this, 1690 Cr has already been recovered so that leaves 4665 Cr. out of that, bank has agreed to classify 1219 Cr as NPA (almost doubling NPAs by its own assessment). That leaves 2984 Cr which Yes bank classified as standard. It is not clear if this classification is in accordance with RBI’s revised guidelines or bank’s own guidelines. I think that’s the main outstanding issue.

RBI can come back and say that 2984 Cr of loans that Yes classified as standard are indeed non-performing and Yes will have to make provisions for it. If and when that will happen is not clear. Perhaps it may happen over next 2 quarters. To me that appears to be the likely scenario. profit growth could remain subdued.

In case of PSU banks, investors were well aware of zombie loans on their balance sheet going by the p/b value at which these banks have been trading. In case of private banks, I don’t think investors assumed that banks have been under reporting NPA since these banks are trading at 3-5 times their book value. Out of these, IndusInd and HDFC are least impacted and these also trade at highest P/b of 4.8. Axis and ICICI have been reporting elevated NPAs for a while so investors have progressively priced their stocks lower (in terms of P/B). that leaves Yes and Kotak.

Bank’s under reported non-performing loans could eventually be written off if not recovered. Since these banks are trading at 3-5 times their book value, for every rupee of write-off, 3-5 rupees of market value will be wiped off.

Yes Banks shares have already dropped 17% since Axis first reported divergence. To me it looks like froth has been cleared. Shares are now trading at 3 times book value which is in line with fair value.

What RBI’s Risk Based Supervision exercise has revealed is the worst case scenario in which entire 2984 Cr will be reclassified as NPA (an unlikely case, assuming no further under reporting is uncovered). In that case, Yes’s NPA position will still look better than where Axis is today. given that Axis trades at 2 times book value, Yes will be trading much better than this.

Overall, I think market has already pushed Yes Bank 17% lower over last 2 weeks. It could still drift lower but a substantial and permanent loss does not look likely. If RBI expands scope of its RBS and include more troubled NPA accounts, more and more loans will be forced to be classified as NPA. On the other hand, things can turn around and current valuation may appear to be a good opportunity. I would have been worried if Yes was the only one that under-reported. However, other well reputed banks are also reporting similar (although somewhat less dramatic) under reporting.

This is not a case where a single bank has been caught deliberately under reporting bad loans. This could very well turn out to be just a case of misinterpretation of RBI rules.

Disc: Invested.

(Chirag) #274

Excellent analysis. Very objective! Thank you!

(Sarvesh Gupta) #275


I don’t agree with your assessment of the situation here.

When there are so many other opportunities in the financial services space where one has good runway for multi-year growth and where one does not have to dabble into giving the company a benefit of doubt, I think one is better off looking at other opportunities than getting into a position bias (not selling because one is already invested). Think of this, knowing what you know today, would you have initiated a fresh position in Yes Bank today, I think the answer for most of the us would have been NO.

Yes Bank has had a fairly shady reputation, some very respectable investors I know consider Yes Bank as nothing more than a glorified portfolio of not-so-great corporate bonds (any decent corporate has an opportunity to tap much lower rate SBI or HDFC or ICICI money). One of the most reputed research house in the country doesnt cover the stock because it has got threatened because of its sell report. UBS report was another incident which all of us are aware. Yes Bank has primarily been saved to an extent because of its superior underwriting and recovery skills no doubt, but growing at a scorching pace with the size it has now - I guess it will become difficult for it to not perform in line with the general economy state - which is bad. Its like portfolio management, if you are managing 500 cr you can show positive returns even in a bad market but if you are managing 5000 cr chances are that your portfolio will not be too divergent from the market (and Yes bank divergence is huge given that 2/3rd of its book is wholesale - inline with other PSUs).

Kotak, IIB and HDFC especially are streets ahead and can’t be compared with Yes because they are heavily focused into SME and retail granular book - something which is difficult to build as well as is higher yielding. Yes is different because its much more wholesale focused. Also, Yes is almost completely urban/middle to rich class focused - where there is no dearth of any banking competition/penetration. Also. none of the above three have any reputational issues in the past unlike Yes.

I dont think NPA classification nitty gritties and parlance is an issue here, the problem is Yes Bank genuinely hide its problemetic accounts and now it has been forced to accept its mistake (1200 cr that it has already accepted and sale to ARC that it did - which is huge in comparison to this existing GNPA stock). And it did raise a lot of institutional money almost a billion dollars, all the while without disclosing any of this.

Reputation in the markets for stocks is like that of an unmarried girl, you never really get a second chance. Post this problem, I think there would be sustained de-rating in the coming years. Yes, all of this may just be a conjecture, but as a small stock picker who has plenty of good & great options to invest elsewhere, why even risk it on a benefit of doubt.

PS - yes bank valuation at 3 times book which appears a tad low is also a bit of optical illusion, just because it recently raised a ery large round in relation to its networth. The discount against leaders is not as high as it appears from the figure.

(Gurjot) #276

This is the key bone of contention which differentiates a prudent management from a pandering to analysts and EPS driven stock price watching management.

A prudent management would classify most of these (if not all) unrecovered divergences as NPAs to leave no shadow of doubt on the loan book. If they then manage to recover these loans - can easily upgrade them back to standard and account for them accordingly to leave the possibility of positive surprises for the market. To compound the folly - the PCR has fallen from 65% to 43% YoY (PCR will obviously decrease if the NPAs increase substantially but could Yes Bank have taken a short term profitability hit and written off a lot more?). But Yes Bank management’s priorities obviously lie in reporting 25% PAT growth every quarter to ensure a smooth linear improvement in bank’s profitability, EPS, etc.

Ujjivan’s management is a great example of such a prudent management. We all know what happened post the demonetization announcement and the subsequent rapid deterioration in loan book. In Q1 2018 - they wrote off 150 cr from P/L i.e. almost 2.5% of the loan book in 1 quarter and 24x increase YoY. From the investor presentation - “Provisions for Q1 FY 2017-18 at ₹150 crore; including ₹43 crore of additional provision to
cover hard core NPAs of Nov-Jan period”

Overall, Ujjivan Q1 2018 they reported a 75 cr loss vs 71 cr profit YoY.

The next day after the results, as the market slowly digested such a shocker from Ujjivan the stock ended 3% higher after initial opening at 10% lower. Could only be read as a market’s gift of clean chit to the management even after such a poor quarter.

And we all know what happened to Yes Bank’s stock after reporting such a healthy 25% growth in PAT :joy::grin::grinning:

I just love this objectivity of the stock market!!!

(vijay1994) #277

Valid points. But my personal opinion is that it is not about just showcasing 25% growth. The bank’s credit costs will go high if they provide huge provisions which will in turn impact aggressive lending and future prospects. So, if the bank decides the standard of account has improved, why to provide provision?

For Ujjivan though, there were fresh slippages even after demonetization period and the credit quality of MFI loans deteriorated significantly. It made sense to provide high provisions and slowdown lending a bit

(Devaki Nandan Tripathy) #278

I want to draw fellow boarders attention to some soft data here. I was watching Rana Kapoor’s presentation after the result and from his body language and voice, I did not find him to be honest and apologetic. It’s as if RBI has erred in declaring those assets as NPA and in few quarters RBI itself would classify those as standard again. There was absolute lack of humility in that speech. Is it something worth pondering or not, I dont know.

Disc. Invested from much lower levels and planning to add in every big crash, but now not so sure.

(yudiagg) #279

I totally agree. with sreered. I do not see any reason to panic. The planned sale of about 14000 Cr of cement plant of JP to Ultratech was considered standard by the YES bank but as NPA by RBI in Q4 FY 17. After the transaction was complete in Q1 FY 18, the NPA entry was reversed. I support the the stand taken by YES bank to consider that account as standard when it was certain that the buyer would release the payment within 3-4 weeks.

In my personal opinion, the RBI team was being too bookish in this case.

(VK) #280

This is not the first time we have seen investors being extremely divergent in their views about Yes Bank… and it had always paid off big being contrary to market sentiment on this - on both sides… The baking industry is trying to figure out how RBS works and guidelines to be followed… RBI is currently brushing all accounts with one brush irrespective of underlying collateral and structure… Growth is core business is solid… Next two quarters would be good (assuming no RBS) and markets will focus on business metrics that are superlative…
Dislosure: Always interested at a price

(Rahul Girish Shah) #281

agreed to many points you highlighted.

but one has to accept that Rana has messed up by not declaring 1219 cr of NPA which he is declaring now … if there was no RBI review than that would have gone unreported.

agree with Gurjot that what stops him from doing what ujjivan did… by taking it on chin for 1 Q and than surprise street for next 3 if those delcared NPAs are infact standard…!

only +ve is he seems very disturbed in accepting NPA and thats very good as he will be trying hard to recover it to last penny…

invested from low levels, 25% of folio. Undecided for atleast next 2 q.

(Peabody) #282

There are obviously divergent views repeatedly with Yes bank.Reasons are very simple:

  1. Very aggressive management -interpreting rules as they see fit (taking advantage of RBI’s ambiguity)
  2. Smart on the field in terms of underwriting/getting new business
  3. Raising money when the going is good
    4.Knows very well How market will behave after knee jerk reaction etc etc

There are many Companies where Management is not very conservative or forthcoming ( India Bulls etc) but the market continues to reward them. That does not qualify Yes Bank as an quality investment candidate.But many in the market look for price movement which can easily happen for a liability franchisee like Yes Bank. Six-Nine months down the line if nothing untoward happens, one may easily see 400+ in the stock.In the midst of all this noise let us not forget the positive growth the bank has been consistently showing.Bottomline it is up to individual investors how to play this counter
Discl- Invested one month back

(Sarvesh Gupta) #283

Posted by mistake (sorry for the same).

(g1) #284

Well, and I am here, invested recently in persuit of a good bank with okayish valuation. Looks like in banking sector it is either pay a premium and stay happy with wat you get or buy something like Yes bank and get stressed on management actions.

I still see value in Yes bank, given the way they are growing, just the NPA hiding tactics are making me jittery and continuously track the news.


(Prash) #285

The key question is the integrity of the management. If and only if RBI tightens the rules, then bank starts reporting the stressed assets means like Bank is really not upfront in declaring bad assets. No doubt, every company wants to postpone releasing the bad news, but in a service industry like banking, it would be good for the company to come forward and report bad news and later surprise the market positively.

In a leveraged business like banking, a couple of bad loans here and there can wipe out complete year’s profit. Yesbank has lost the credibility and need to build credibility again

Disc: Exited after the Q2 results.