YES Bank Q1 slippages lowest in 8 quarters but Kotak says 'Sell' stock, shares target price

YES Bank Ltd saw its shares climbing 5 per cent in Monday's trade following better-than-expected quarterly earnings, with its slippages at 2.1 per cent were lowest in 8 quarters. Kotak Institutional Equities said the write-back in investment depreciation -- mostly related to resolutions in loans sold earlier -- aided a lower provision. It maintained its 'Sell' rating on the stock, saying the risk-reward remains unfavorable with the underlying return on equity (RoE) improvement likely to be slow.

YES Bank shares climbed 4.88 per cent to hit a high of Rs 25.99 on BSE. The stock is up 13 per cent in 2024 so far and 47 per cent in the past one year.

YES Bank clocked a 47 per cent a year-on-year (YoY) jump in the net profit at Rs 502.43 crore on 12.2 per cent YoY rise in net interest income (NIIs) at Rs 2,244 crore. Net interest margin for the quarter came in at 2.4 per cent.

Kotak said the prior few quarters saw a shift in focus towards slippages in the retail portfolio. The bank had highlighted that it is witnessing higher delinquencies in certain product portfolios such as unsecured loans. The June quarter continued to see most of the slippages from retail loan portfolio but the absolute levels of slippages were steady and not showing worsening trends.

"We are not seeing any worsening trends in the 31-90 DPD portfolios as well. We are likely to wait for a few more quarters as more lenders are still cautious on this lending segment. The other issues persist as discussed earlier: Redemption in security receipts would continue to show lower credit costs for the bank. Forecasting this quantum and
timing of these benefits would be challenging," Kotak said.

Kotak said YES Bank needs to improve its RoE profile and the levers that the bank is focusing are mostly through reducing the negative impact caused by PSL shortfall by consistently meeting the regulatory requirements each quarter and improving the cost-income ratio through better sourcing.

The path for this improvement is likely to be slow and steady, it said.

"The liability side of the balance sheet is not showing any worsening trends and the growth in low-cost liabilities remains impressive adjusting for seasonal variations," it said.

Kotak has an unchanged fair value of Rs 19 on YES bank, valuing the bank at 1.1 times book and 11 times June FY2027 EPS for RoEs that are still below 10 per cent. The investment thesis, Kotak said, remains unchanged that YES Bank remains far above its fair value for the return ratios that it is currently generating.

"We factor the lower credit costs to our models but note that the re-rating is contingent on better RoE profile led by sharp NIM expansion, which appears unlikely in the medium term," it said.