Core performance points to stabilization; incremental stress pool sale
The revamped leadership (leveraging on the backing of leading shareholder banks, changed governance and underwriting framework) is stabilising and turning around YES from its downcycle.
This is evident from its better-than-expected operating performance since past three quarters. It not only achieved but overshot (on a few parameters) the guidance articulated for FY22: 1) Exit quarter slippage run-rate managed at 70% and cost to assets at 2.4%.
After pencilling in RoAs of 0.4% for FY22, driving it up towards FY23 target of 0.75% and 1.0-1.5% by FY25 will require advance growth scale up to mid-teens and cost efficiencies, besides further improvement in NIM trajectory and sustained credit cost. We expect RoA profile of 0.6% / 0.7% for FY23E / FY24E. There is turnaround in relevant operating metrics and improved confidence in stability of franchise. Nonetheless, we remain cognisant of risks from delay in resolution of stress pool, net labelled exposure of 5.3%, modest RoE profile during transition and supply overhang post the expiry of lock-in shares. We maintain HOLD with an unchanged TP of Rs14.
YES Bank reported >37% QoQ growth in PAT to Rs3.67bn in Q4FY22, ahead of our expectations, primarily due to lower credit cost and further NIM expansion to 2.5%. Positively, earnings momentum primarily flowed from core business stabilisation more than offsetting treasury loss of Rs260mn. Operating profit was up 6% QoQ. NIM improved 5 bps QoQ to 2.5% that supported 3% QoQ growth in NII.
Slippages at <1.7%; recoveries/upgrades momentum sustained: Net labelled exposure stood at 5.3% (vs 6.3%/6.5%/6.7% in Q3/Q2/Q1FY22), restructure pool at 3.6%, SMA-2 at 0.7% (1%/1%/2%), SMA-1 at 2.4% (2.8%/2%/4.6%). GNPA ratio marginally declined QoQ to 13.9% (vs 14.7% / 15.0% in Q3/Q2FY22) while corporate NPAs remained stable at 28.4%. Retail NPAs improved to 1.7% vs 2.1% QoQ, SME NPAs were down 20bps QoQ to 3.5% and mid corporates almost stable at 2.0% vs 2.1%. Slippages run-rate was lower at <1.7% or Rs8bn (Rs9.8bn / Rs17.8bn in Q3 / Q2). Decline was primarily due to corporate slippages being lower at Rs3.7bn (vs Rs4.35bn / Rs7.5bn) and retail slippages were down to Rs3.33bn (vs Rs3.88bn / Rs8.88bn). Overall, rise in recoveries and upgrade coupled with lower slippages resulted in lower GNPA and reduction in labelled exposure. Although GNPAs are expected to trend downwards with improved recoveries, trajectory will also be contingent on stress pool sale.
Net labelled exposure, restructuring and SMA-1/2 pool declining gradually: YES cumulative gross non-performing exposure and restructured advances are still equivalent to 22.8% of advances plus corporate investments (vs 23.5%/24.3%/25.5% in Q3/Q2/Q1FY22). On this stressed pool, it carries coverage of 63%.
Gross restructured loans including DCCO, Covid 2.0 and MSME 2.0 stood at Rs67.5bn. Overdue loans in 61-90 days bucket were lower by Rs6.8bn QoQ and in 31-60 days bucket lower by Rs8.2bn QoQ.
Contained credit cost as ageing-related provisions offset by recoveries: Overall Q4FY22 provisioning of Rs2.7bn was primarily dominated by investment depreciation of Rs5.3bn (including step up provisioning of Rs3.2bn for SRs). Else, recoveries from written-off account of Rs4bn and provisioning reversal of Rs5.5bn on upgrades/recoveries had more than offset provisioning on slippages and step up in coverage. Specific loan loss coverage improved to 71% from 67% QoQ and 66% YoY. Three borrower accounts with an aggregate exposure and provisioning of Rs6.33bn were classified as fraud during Q4FY22. On this, 25% of provisioning was routed through P&L and balance 75% (Rs4.75bn) was knocked off from reserves. With net labelled exposure at 5.3%, restructured pool at 3.6%, SMA-2 at 0.7% and SMA-1 at 2.4%, we build in credit cost of 1.0% / 1.0% over FY23E / FY24E, respectively.
Transfer to ARC expected to conclude in H1FY23: The bank is in the process of setting up an ARC wherein it endeavours to own a stake and proposes to transfer bulk of its NPA portfolio and stress pool. The process was anticipated to conclude by Mar’21, but has been deferred due to covid pandemic and pending regulatory approvals. It is now expected to conclude by H1FY23. This will likely lead to offloading of stress pool from its balance sheet. Management is confident of carrying more than adequate provisions on identified pool and expects no further provisioning need during transfer. The transfer of assets to ARC would be at an arm’s length and given it proposes to hold stake in ARC, profitability of ARC will also be shared among the stakeholders in their respective share. On transfer of assets, transferor would be eligible for 15% cash and balance 85% would be security receipts.
Granular retail and SME advances drive new business formation: Loan book was up 3.0% QoQ and 8.8% YoY (compared to (30.4)/(2.7)/(0.5)/3.5/3.9% YoY growth in Q1FY21/Q4FY21/Q1FY22/Q2FY22/Q3FY22, respectively). In-line with its medium-term objective of creating a granular asset portfolio, YES continues to build its retail advances, which were up 31% YoY and 9% QoQ. Retail advances mix at 36% was up ~230bps QoQ. Retail + MSME advances now constitute 60% of advances (vs 44% in FY20 and 51% in FY21).
New business formation is gaining traction: 1) Gross retail disbursements stood at Rs102bn (compared to Rs93.3bn/Rs84.8bn/Rs50bn in Q3/Q2/Q1FY22 and Rs75bn each in Q3FY21 and Q4FY21), 2) SME disbursements at Rs50.9bn (Rs49.4bn/Rs45.6bn/Rs32.4bn in Q3/Q2/Q1FY22, Rs41bn in Q4FY21) and 3) wholesale banking disbursements at Rs37.8bn (Rs47.6bn/Rs37.4bn/Rs36.3bn in Q3/Q2/Q1FY22). Having addressed, recognised and provided for the legacy corporate stress book, YES is now willing to resume corporate lending focused towards transaction banking and working capital financing. For FY23, the bank is now targeting retail growth of >25%, wholesale growth of 10% translating to overall portfolio growth of ~15%. We pencil-in credit growth of 16%/18% for FY23E/FY24E, respectively.