Shares of YES Bank Ltd rallied 10 per cent in Monday's trade after the private lender report 2.5 times year-on-year (YoY) rise in earnings growth led by a 40 per cent decline in provisions and 20 per cent YoY growth in operating profit. The stock climbed 9.74 per cent to hit a high of Rs 21.29 on BSE, trimming its year-to-date fall to 7.9 per cent.
YES Bank said its slippages stood at 2.3 per cent and were driven by retail loans. Provision reversals in investment portfolio kept credit costs low, it said.
Kotak Institutional Equities is not impressed, however. It said stress in retail loans offsets the positives.
"We maintain SELL rating (fair value at Rs 18 from Rs 19 earlier) as we watch through the developments in the retail loan book. Lower provisions aid earnings recovery off a low base," Kotak said.
Kotak said YES Bank's trends are still quite volatile given the impact of provision released from the redemption of security receipts.
YES Bank's NII growth for the quarter stood at 15 per cent YoY, while its NIM was unchanged at 2.4 per cent. Gross NPL and net NPL ratio were largely unchanged QoQ at 1.6 per cent and 0.5 per cent, respectively. Slippages from SME were lower at 1.3% and there was negligible slippages in mid-corporate loans.
Credit costs stood at 95 basis points but overall provisions were lower due to release of provisions from the security receipts portfolio, which carries a high provision coverage ratio, Kotak said.
The brokerage said there was a mixed performance on asset quality front, with retail showing persistent weakness
"The bank continues to make progress in rebuilding the franchise. Deposit mobilisation is strong and visible in CASA growth (30 per cent YoY) and cost of deposits (largely unchanged in recent quarters). Pressure on NIM due to shortfall in PSL compliance, that is currently parked in low-yielding investments (RIDF), is likely to continue in the medium term although the bank is making efforts to reduce its impact," Kotak said.
The loan mix appears to be comfortable but the quality of loans mobilised has room for improvement.
The YES Bank management has highlighted that it sees stress (slippage at 4 per cent in retail loans) continuing for the next few quarters. On the other hand, credit costs are likely to be low due to be reversal in provisions made in the security receipts portfolio.
"However, this is still higher than our estimates as we had assumed negligible provisions, but this has now been partly offset due to higher-than-estimated slippages," Kotak said.
Kotak said the YES Bank stock has seen a significant price correction in recent months, but it is still expensive, considering that the recovery in return ratios is likely to be slow.
"The bank needs to demonstrate superior underwriting and visibility of NIM improvement in terms of timelines to make it easier to understand the RoE profile. These improvements have to come sooner as reversal of provisions will decline over a period of time," it said.