Brokerages have cut their price targets for YES Bank after the Supreme Court upheld the Rs 8,415 crore AT1 bond write-down, warning that weaker capital and margin prospects could outweigh a resilient quarterly performance.
Analysts remain largely sceptical on YES Bank after the Supreme Court’s decision to uphold the write-down of Rs 8,415 crore of additional tier-1, or AT1, bonds, with several brokerages cutting their price targets even as the lender’s reported quarterly performance held up. Nomura said the court ruling would cut into shareholders’ equity and that the stock had already fallen about 20 per cent since the judgement, prompting it to lower its target to Rs 18 from Rs 23 while keeping a Neutral stance.
The broader broker sentiment is still weak. Bloomberg data cited in the market report shows 10 Sell calls on the stock, versus two Buy recommendations and two Hold ratings, even after the share price has slipped 26 per cent over the past 12 months. Goldman Sachs has put a target of Rs 17 on the counter, while Citi’s target is Rs 16.50 and Kotak Institutional Equities and Nuvama Institutional Equities are both even more cautious at Rs 16.
The latest quarter showed that operating momentum was not enough to quiet concerns about capital and margin pressure. Nomura said higher operating expenses and lower fee income hit core pre-provision operating profit, even though profit after tax met expectations because of non-core income. Goldman Sachs, meanwhile, said core revenue growth was in line with forecasts and that pre-provision operating profit came in better than expected, with the earnings beat helped by strong recoveries from legacy assets that can be lumpy.
The capital issue is now central to the investment case. The bank’s pro forma numbers indicate a net loss of Rs 5,217 crore and a common equity tier-1 ratio of 11.4 per cent after the AT1 impact, according to the report. Nuvama said the potential hit could slow growth acceleration and noted that State Bank of India’s strategic investor Sumitomo Mitsui Financial Group may need to inject capital, possibly taking its stake above 26 per cent and triggering an open offer. A larger holding could also open the door to a merger between SMFG India Credit and the bank, Nuvama said.
Even so, some analysts see scope for a recovery if YES Bank can keep loan growth intact and protect margins. Ventura Securities has kept a Buy rating and a target of Rs 24.2, implying 39 per cent upside over 24 months from the prevailing price, while Goldman Sachs said loan growth excluding the FCNR-related effect was 3 per cent quarter-on-quarter and 16 per cent year-on-year, helped by commercial banking. Citi warned that the mobilisation of foreign currency non-resident deposits could weigh on near-term margins, because the funding cost starts immediately while the lending benefit arrives later. That leaves YES Bank with a more complicated task than simply delivering better earnings: it must also persuade investors that its capital position, margins and growth path can stabilise after a judgement that has reshaped the outlook.
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