YES BANK Recalibrating strategy; transition to be arduous : Edelweiss

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Yes Bank’s (Yes) Q4FY19 performance, under the new leadership, was a reflection of management’s shift to a conservative & prudent approach, calibrated growth strategy and re-building credibility & confidence. The bank, proactively, created higher contingent provisions (upfronting stress) and pruned corporate exposure (QoQ dip in loan growth and lower fee), which led to PAT loss of INR15bn. The strategy of building granularity, strengthening retail, taking calibrated risks and focus on governance, transparency & compliance is commendable. However, transitioning will be arduous, entailing lower growth as well as returns given: a) softer revenue traction as focus shifts to risk; b) lower fee due to conservative policy; and c) modest earnings recovery due to early stress recognition & provisions. Hence, we revise down FY20/FY21E EPS 45%/40% and BV 9%/15% (after factoring 10% dilution in FY20). Consequently, we downgrade to ‘HOLD’ with revised TP of INR250 (1.75x book; earlier INR279).


A quarter full of surprises With an eye on being more transparent, prudent and proactive, Yes made key transitions: a) focus on granularity leading to run-down in corporate book (down 1% QoQ); b) upfront stress recognition & proactive identification of new INR100bn stress pool with 20% contingent provision on that; and c) write-back of elevated fees & accounting policy change on fee income (from upfronting to amortising) leading to write-back of INR2.8bn. These cumulatively led to the bank reporting INR15bn loss. Going forward, Yes aims to maintain these standards (guided for 1.25% credit cost in FY19, 20-24% growth), which we believe will lead to moderate earnings growth. Unveils new road map; transition to be challenging Under the new leadership (Mr. Ravneet Gill, MD & CEO), Yes unveiled strategy focusing on: a) transaction banking; b) strengthening of retail/SME; and c) aggressive liability generation to prune cost of funds. Management wants to shift banks profile to normalized growth (20-25%), better quality with an aim to reach 1.5% RoA in long term. Outlook and valuation: Transition key; downgrade to 'HOLD' The new leader is determined to usher Yes in the right direction underpinned by conservatism, sustainability, governance, compliance and transparency. This, we believe, could be challenging in the early transition phase. Reset in growth and return profile will eventually weigh on valuations. Hence, we downgrade to ‘HOLD/SU’ from ‘BUY/SO


Highlights from analyst interaction new CEO Mr. Ravneet Gill: A combination of three factors to be cornerstone of new strategy:  Transaction banking group - key focus area.  Strong build-up in retail/SME segments.  Aggressive liability generation. Calibrated growth of 20-22%; targeting long-term RoA of 1.5% (1.0% in 18-24 months):  Improved & granular liability structure.  Higher retail & SME book.  Lower cost of funds.  Rise in transactional revenues from retail & transaction banking.  Normalisation of risk & improvement in customer profile. Following are the key discussion points with the management: What kind of culture will you like to set in the bank?  Yes Bank has attracted a lot of regulatory scrutiny, which is not in the bank’s best interest. We want to be on the right side of the regulator, set benchmarks for governance, set new course on transparency & follow conservative policies that enhances belief & confidence in Yes Bank's franchise & performance. E.g., fee income will not be upfronted, but amortised.  Risk will be more calibrated & widespread rather than being concentrated.  To address the issues & bring in better processes, governance & compliance, it has hired seniors in key control functions. What is the difference in strategy compared to the earlier one?  Earlier also the strategies were framed with an intent on building granularity, but not many resources had been committed to it. Strategies not effectively came to fruition & what it needs is an approach of innovation, more technology orientation & allocation of adequate resources to drive the strategy.  Density & richness of data is phenomenal at Yes Bank.  Digitalisation will focus on mass customisation. The bank is eyeing digital leadership through smart partnership--everyone is in open architecture model.  Product range will remain more or less intact; however, it is planning to introduce more products. Why create contingency provisioning now & is it in a nature of kitchen sinking?  Some of the larger exposures are facing headwinds; episodic nature of portfolio led to this.


 The situation post September led to its recognition & not much to do with change in leadership.  It's not kitchen sinking---identify right pool of stress & provide 20% on it. It was an expression on part of management team to be conservative. As far as loss given defaults are concerned, it is under control.  Timeliness on monetisation have primarily led to recognition of this stressed pool & proactive provisioning. Collateral positions are as strong as they used to be. But what the new leadership realised was that the corporate portfolio is more collateralised. What will be the focus of the bank on corporate segment?  The corporate segment will continue to be Yes Bank’s calling card. However, instead of long-term project finance, it will focus more on second element of transaction banking.  Will stay away from real estate & infra sectors.  Will have sectoral/borrower-groupwise caps on incremental lending.  One thing to change will be cross-sell and it is a low hanging fruit viz., LC commission, guaranteed commission. Currently, corporate relationships are not effectively churned as only 11% of customers give payments business. Comment on cost of funds being higher than peers  Branches were more asset led & not liability led.  Centralised in terms of decision making, but now it will be more bottoms-up focus on profitability.  Government business is a big part of the business.


Q4FY19 earnings call takeaways With respect to strategy and comments from CEO - Ravneet Gill  Themes that will drive the path forward are: a) scaling other businesses (retail and transaction banking), apart from corporate banking; b) focus on more granular assets & liabilities by de-centralisation of power; and c) focus on digilatilisation.  Liabilities are very important. That said, due to single minded pursuit earlier, the focus on cross sell for liabilities was lost and this is what is emphasised now. This will be done by more devolution of power at the granular level (earlier this was more centralised). o Of the 1,100 branches currently, 30% are profitable; management expects to take this to 80% by FY23 and 100% by FY25. o Management believes that 1,100 branches are notch lower than peers (indicating that branch additions will continue).  In terms of people, Mr. Gill highlighted that Yes Bank has a strong and committed team and all the building blocks are in place which will drive the bank forward. Recent media articles are just speculative (no desire to destabilise the management). A few senior hiring is on the cards, but that is more on business handling part (more on the back-end and retail liability).  Wants a more calibrated growth model than to chase growth and build more granular business – thus aims growth at early to mid-20’s loan growth level. With respect to asset quality  One-time contingency provisions of INR21bn (essentially relates to assessment of credit portfolio of below investment grade book, this form 20% of the book on which risks are assessed viz. INR100bn of stress book). The sectors are predominantly real estate, infra, media and entertainment (which have been in the news for some time now). o Management pegs credit cost at 125bps in FY19. o Provisions composition – Specific provisions – INR12.7bn, contingency provisions – INR21bn, INR2.43bn of MTM provisions and INR0.5bn other provisions.  Gross slippages during the quarter were INR34.8bn, of which INR5.5bn is towards an airline company and INR5.29bn is towards a stressed infra account. o The bank has by and large treated exposure towards stressed infra account as NPL; only INR0.86bn is standard, on which the bank has provided 15%.  One sale of NPL during the quarter on all cash basis of INR1.7bn (for INR1.95bn exposure).  CRE book is 7%. This has 70%/30% between residential/ commercial. The luxury end of residential is seeing some liquidity pressure. Yes Bank has mostly addressed the stress book in Q4FY19 or in contingency provisions. \


With respect to operational metrics  Expect early to mid 20s growth, of which growth will be driven by retail. Medium to long term target of 50% corporate and 50% retail/SME mix. o Loan growth of 19% YoY / dip of 1% YoY owing to more sell down and repayment during the quarter. Retail continues to sustain good growth momentum ( up > 60% YoY). o Within corporate banking, focus will be on more working capital loans.  Deposit grew 13.4% YoY / 2.2% QoQ; some moderation in CD ratio to 106% from 109% in Q3FY19. o The granular book of CASA + retail TD rose to 59% from 57.5% in Q3FY19. Retail deposit growth was strong at >44%, a vindication of management’s effort on the same.  NIMs during the quarter were impacted by INR1bn of interest income reversal during the quarter (higher slippages).  Has seen some correction in non-interest income marred by a couple of one-offs in corporate fees. Has looked at large exposures and unwound exposures; this led to write-back of INR3bn of corporate fees. o The bank also proposed to make accounting changes to corporate fees – wherein if above a threshold, fees will be amortised over a period than booked upfronted. This will push down fee growth than earlier anticipated.