Moneycontrol
Last Updated : Feb 14, 2019 11:22 AM IST | Source: Moneycontrol.com

Yes Bank was mistaken as a 'crow instead of black swan'; brokerages see up to 80% upside

Asset quality divergence was one of the biggest reasons for RBI insisting on a change of leadership

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Yes Bank rallied as much as 30 percent, the highest intraday bounce seen in the stock since July 2005, after the company announced no divergence on the asset classification and provisioning for FY18. Brokerages have upgraded ratings on the stock and see up to 86 percent upside.

Remember, the asset quality divergence was one of the biggest reasons for RBI insisting on a change of leadership. This is a positive development for Yes Bank and should result in sharp re-rating of the stock.

Reacting to the news, Jefferies maintained its buy rating on Yes Bank with a target of Rs 275. It said the RBI's refusal to allow the reappointment of Rana Kapoor as CEO of Yes Bank was a black swan event — indeed, the stock corrected by 30 percent after the news.

“However, with the RBI's audit report now citing nil NPL divergence, we seem to have mistaken a mere crow for a swan. As noted in our Q3 earnings report, we now await the bank's new strategy, if any, as the risk audit report has made the balance sheet pristine,” it said.

However, the global investment bank raises one question which still remains unanswered. “Amid these decisions, the question of why the RBI ordered Rana Kapoor to go, remains unanswered. We believe it is time for the RBI to increase transparency on decisions that have a significant impact on minority shareholders,” said the report.

RBI conducted its first asset quality review (AQR) of banks in 2015 in order to find corporate loan accounts with severe financial weakness, but was still classified as standard accounts on the books of the lenders.

Post this review, RBI found a large divergence of Rs 4,176 crore in the reported gross NPAs in the books of Yes Bank for 2015-16.

Further, the RBI judged gross NPAs at Rs 8,373.8 crore for Yes Bank for 2016-17 against the declared gross NPAs at Rs 2,018 crore. Thus, there was a divergence of Rs 6,355 crore or three times the reported amount.

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JM Financial has upgraded the stock to buy with an unchanged target of Rs 275. Two key concerns for the bank have been addressed over the past month: 1) greater leadership clarity with Ravneet Gill being appointed as CEO, and 2) Bank has received RBI’s divergence report which clarified that the bank had NIL divergence from RBI’s IRAC norms for FY18.

“We had turned cautious on the bank in 2QFY19 (note) given an interim inability to address the gap between perceived asset quality worries and headline stress ratios, despite its superior loss rates on a predominantly wholesale portfolio,” it said.

SBI Cap Securities has put out the most aggressive target for the stock at Rs 315 which translates into an upside of over 80 percent from Wednesday’s closing price of Rs 169 on the BSE.

The regulator’s communication that NPL divergences have been addressed, also indicate a streamlining of processes at the bank and the regulator’s comfort with the change.

“We now believe risk-reward on the name is highly favourable (trading at 1x FY21E adj. P/BV) and would advise investors to buy even on the sharply positive reaction on the stock,” said the report.

Yes Bank (YES) appears to have made a compelling statement to the market, to the investors and in particular to all its skeptics about its compliance practices in reporting bad loans.

Also read: Yes Bank rallies 26% as RBI finds no divergence in provisioning, asset classification

The Reserve Bank of India (RBI) has found ‘nil’ divergence in the asset classification and provisioning by YES for FY18.

“Importantly, this development comes after months of speculation on the magnitude of divergence that the bank was expected to report (the range was as high as the balance sheet size of some of the smaller banks), particularly after its MD & CEO was forced to step down by the RBI,” Motilal Oswal said in a report.

“Clarity in this regard will thus help the bank to clear the air on one of the key overhangs and start a fresh journey under the new MD & CEO, who has to join office before March 1, 2019,” it said.
First Published on Feb 14, 2019 11:05 am
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