SMBC acquisition: Sell YES Bank shares, says Kotak as it sees no change in business model

Domestic brokerage firm Kotak Institutional Equities has maintained its 'sell' rating on YES Bank even after the announcement of a significant stake acquisition by Sumitomo Mitsui Banking Corporation (SMBC). The domestic brokerage firm said that there is no clarity on the changes in the business model even as the clarity on the buyers emerges.

On Friday, SMBC announced plans to acquire a 20 per cent stake in Yes Bank for Rs 13,482 crore. The acquisition involves buying a 13.19 per cent stake from SBI and the remaining 6.81 per cent from HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank, IDFC First Bank, Federal Bank, and Bandhan Bank, as per the exchange filing.

Kotak said that it is unsure if SMBC would be able to raise its stake further by buying out at a later date or through subsequent equity infusion. The transaction does not change the business view of Yes Bank, but removes the uncertainty of a buyer. SMBC has the right to nominate two directors, while SBI would have the right to nominate one non-executive and non-independent director.

Shares of YES Bank Ltd rose more than 2 per cent to Rs 20.82 on Tuesday, commanding a total market capitalization of more than 65,000 crore. The stock had settled at Rs 20.40 on Monday. The stock is down 24 per cent from its 52-week high at Rs 27.41 hit in July 2024, while the stock is up 30 per cent from its 52-week low at Rs 16.02, hit 2 months ago.

The recovery in Yes Bank to where it is today marks a unique case in the Indian banking industry where a coordinated effort from stakeholders has helped rebuild an institution from the depths of a crisis. Importantly, the return made by selling shareholders has been better than initially expected, said Kotak.

"Such solutions are easier when the problem is unique to a single player and the macro environment is favorable, but we see that most lending cycles tend to affect several players simultaneously. Note that Yes Bank is yet to deliver profitability and growth ratios closer to the industry average," it added.

According to market analysts, YES bank has successfully granularized its loans and deposits, but it has been challenging to report profitability ratios closer to the industry average.

Yes Bank's recent financial performance showed a 63.3 per cent year-on-year (YoY) increase in net profit to Rs 738.1 crore for the quarter ending March 31, 2025. The bank's net interest income rose by 5.7 per cent YoY to Rs 2,276.3 crore, with net interest margin improving to 2.5 per cent for the quarter.

SMBC stake acquisition is sentimentally positive for YES Bank, as it removes the overhang associated with the incoming strategic investor but fundamentally, it would take multiple quarters for the bank’s RoAs to improve, said Yuvraj Choudhary, Research Analyst at Anand Rathi Institutional Equities.

"We maintain 'sell' on YES Bank with a fair value of Rs 17, valuing the bank at 1 times book and 10 times March FY27E EPS for RoEs that are still 10 per cent. While we acknowledge that the transaction is set at a price higher than our Fair Value, we are constrained to view this transaction from the viewpoint of a minority shareholder and a wider spectrum of choices available to invest in the market," Kotak added.

Other brokerage firms have also been mostly negative on YES Bank. Nomura maintained a 'neutral' rating on Yes Bank, setting a target price at Rs 17. Similarly, ICICI Securities also retains a 'neutral' position with a target price of Rs 16. JM Financial Services advised a 'sell' rating on Yes Bank, assigning a target price of Rs 15 per share.