We are recommending Buy on our Actionable Ideas "Yes Bank" as per following:-
CMP: Rs 221 Target: Rs 300 (35% Upside)
Key Points:
Yes Bank – Stock Update: Improved Outlook; Two major challenges removed
· Outlook improves for Yes bank: As per our view, there were mainly three major challenges / overhangs before Yes Bank stock. Of those, two have been removed. That is, the management transition has been smooth, and now the RBI's inspection report has given it NIL divergence. The third, of capital raising is less of an issue and will only be a matter of time now, facilitated by 1) The confidence reposed by the regulator and 2) The likely improvement in valuations. Hence capital raising is not a major impediment anymore, in our assessment. Hence, overall, this development improves the outlook significantly for Yes Bank.
· RBI's divergence report gives clean chit to Yes Bank – a big relief, improves outlook: Yes Bank received NIL divergence in the latest RBI's Risk Assessment Report for FY2018. The Reserve Bank of India (RBI), via its RAR assesses compliance by Banks with extant prudential norms on income recognition, asset classification and provisioning (IRACP). The Divergence refers to the difference between the Reserve Bank of India (RBI)'s inspection report and the bank's own reported figures. Notably, in earlier instances, the bank had reported a fairly large amount of divergence which had cast aspersions on the bank's reported asset quality figures. Yes Bank reported a divergence in gross bad loans of Rs 6,355 crore for FY17 (~3x the GNPA for FY17) while for FY16 it was Rs4925 crores. In the backdrop, a NIL divergence report (for FY18) this time is significant positive. A clean chit from the regulator allays fears of ever-greening and under-reporting of NPAs, all of which had spooked the market and investors. Indeed, the move will be looked upon as one inspiring confidence on the reporting standards, the status of the reported asset quality and corporate governance standards in the bank.
· Outlook: Considering that the overhang on leadership and on the question of divergence are now out of the way, we believe that the outlook has improved significantly for Yes bank. The environment is more conducive for the stock to re-rate from the lows that it had seen last year. The question of shoring up of capital, is also not as vexing as earlier. At present, Yes Bank's capital adequacy at CRAR of 17.4% and Tier-1 of 12%, and considering its quarterly burn rate, we believe Yes Bank still has a few quarters before the need to raise additional capital becomes acute. Also, an improvement in valuations will also be a facilitator for the bank for raising capital at attractive rates. We opine that the near term outlook for Yes Bank has improved significantly, especially with this development. We believe that the focus now shifts to the strategy and execution by the new leadership, especially in terms of its retail and corporate banking strategy.
· Valuation: Yes Bank currently trades at ~1.4x its FY20E book value, which we believe is attractive, considering the improved scenario and outlook for the stock. We upgrade our rating to Buy on the stock with a revised PT of Rs. 300.
Regards,
F1,Achyuta,111,bharathidasan salai,
Cantonment
Trichy-620001
Tel:04314000706
Ph:8144517351
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