Fundamental Analysis of Yes Bank

Fundamental Analysis of Yes Bank: The second half of the calendar year 2022 was about banking PSUs giving multi-bagger returns to their shareholders. The rally was led by improvements in asset quality and record growth in advances. But there is another bank, although not the government, that has come out of recovery.

The infamous Yes Bank. In this article, we’ll perform a Fundamental analysis of Yes Bank to know where it stands today, its future prospects, and more.

Fundamental Analysis of Yes Bank

To understand what are the future prospects of Yes Bank and whether it is on the path to recovery, it is imperative to understand what happened under Rana Kapoor’s watch. We start with a quick overview of the company. Later we learn about the fraud and the consequent bailout. Next, a few sections cover the financials of the stock. A summary concludes the article in the end. 

Company Overview

Yes Bank was founded in 2004 by Rana Kapoor and the late Ashok Kapur. Over the years, it grew to become one of the banking giants in India with its valuation crossing Rs 1.1 lakh crore at its peak.

As a full-service commercial bank, it provides a broad range of banking, asset management, and other financial services to corporate, retail, and MSME customers. Furthermore, the bank also offers investment banking, merchant banking, and brokerage services through its wholly-owned subsidiary Yes Securities.

It is presently the 7th largest private bank in India in terms of market capitalization with a value of Rs 49,000 crore.

But it is very likely you know the bank more because of its collapse and not its highs. Its reputation has been marred by the various things that happened at the company.

In the next section of our fundamental analysis, we cover what happened at Yes Bank. 

Why did Yes Bank collapse? 

The period before 2014

The bank initially attracted deposits by paying higher interest rates. These deposits were primarily deployed for lending to corporates to obtain higher interest income. And for a long time, the bank earned stellar profits. 

As of March 2018, corporate banking constituted 67.9% of the total advances portfolio. Meanwhile, retail and MSMEs accounted for 32.1% of the advances. And these loans were made to troubled firms like DHFL, Anil Ambani-led Reliance companies, and Essel Group.

The period from 2014 to 2018

Thus, when RBI under Raghuram Rajan started cleaning up the bad loans from 2014, Yes Bank’s name came forward. And the issue was far greater than the riskier loans lent by it.

The bank was under-reporting its NPAs. The reported NPAs of Yes Bank stood at only 0.31% in 2014. The officials at the central bank disagreed.

But that’s not it. The banker was also involved in money laundering. Rana Kapoor diverted funds through corporate loans with the help of DHFL. It lent money to DHFL, which put money into the companies owned by Kapoor’s daughters. 

The year 2018

Soon, the investigation unfolded as the government & RBI realized Yes Bank’s financials were in a very dire state. The central bank declined Kapoor’s proposal to extend his tenure as CEO. He had to step down.

What followed after this was simply RBI’s efforts to avert a large financial crisis in India.

Bail Out of Yes Bank

The year 2020

March 2020

As its first step, the central bank took over the board and put a moratorium on Yes Bank in March 2020 to avoid a bank run situation. It meant the bank could not give large withdrawals, provide/renew loans, make investments, borrow money, etc.

Additionally, to save the bank and avert a liquidity crisis, RBI roped in HDFC Bank, State Bank of India, Axis Bank, and ICICI Bank. Various banks invested money in the bank with a lock-in period of 3 years on 75% of their investment. For instance, SBI invested Rs 6,050 crore picking a 48.21% stake.

This is important to note because the lock-in period for these investors is set to expire in March 2023. This is risky because when large investors sell their bulk stakes, the share price usually falls.

June-July 2020

Additionally, the new board under SBI launched an FPO in June-July, 2020 for Rs 15,000 crore for the recapitalization of the bank. Several big names participated in the capital raise including SBI itself, LIC of India, PNB, Bajaj Holdings, IIFL, and more.

The year 2022

And that’s not all. Recently in December 2022, Yes Bank further raised roughly Rs 8,900 crore from private equity giants Carlyle and Advent by selling a 9.99% stake. Thus, we can sum it up at this stage that Yes Bank seems to be adequately capitalized to expand in the coming years.

We have covered the most important section as part of our fundamental analysis of Yes Bank. In the sections ahead, we will race through the figures for the past five years. 

Yes Bank – Financials

Income & Net Profit Growth

The net interest income of Yes Bank has been volatile over the last five years. The bank accounted for huge provisions of Rs 28,312 crore in FY20. This resulted in a heavy loss of Rs 16,418 crore.

Overall, the table below presents the net interest income, other income, provisions & contingencies, and net profit or loss of Yes Bank for the last five years. Overall, we can see that the bank is on the path to recovery.

Fiscal Year	NIM	Other income	Prov. & cont.	Net profit/loss
2022	6,497	3,405	1,850	1,064
2021	7,429	3,107	8,107	-3,462
2020	6,805	11,956*	28,312	-16,418
2019	9,809	4,675*	6,417	1,720
2018	7,737	5,293	3,526	4,225

*The other income rose sharply in FY20 as the new management wrote off liability on AT-1 bonds as part of the restructuring process. However, recently in January 2022, the Bombay High Court rejected the write-off implying a renewed liability for the bank. RBI and the bank management may appeal to the Supreme Court against the order.

Advances & Deposits Growth

Every bank earns profit through the interest income which is the difference between the interest it:

1. earns on the money it lends (advances) 
2. pays to customers for their deposits (deposits)

Thus, among other things, for Yes Bank to increasing its net interest income, it has to attract more deposits and advances. The table below highlights how the two heads have increased in value in FY22 after falling off their height in FY19.

Fiscal Year	Deposits	Advances
2022	197,192	181,052
2021	162,947	166,893
2020	105,364	171,443
2019	227,610	241,500
2018	200,738	203,534

But as Raghuram G. Rajan said in his book ‘I do What I do’, “Finance is not just about lending, it is about recovering loans also.” This is where Yes Bank blundered while giving loans to risky entities. In the next section of our fundamental analysis of Yes Bank, we look at the non-performing assets (NPAs) or bad-loans situation of the bank.

NPAs & Asset Quality

The asset quality of the bank has improved considerably since FY 2020. It stood at a shocking 16.8% for GNPAs and 5.0% for NNPAs at the end of the fiscal year. Fast forward to Q3FY23, it has gotten better at 2.0% and 1.0% respectively.

The table below shows the Gross NPAs and the Net NPAs of Yes Bank for different ending periods. 

Period Ending	Gross NPA (%)	Net NPA (%)
Q3FY23	2.0	1.0
FY2022	13.9	4.5
FY2021	15.4	5.9
FY2020	16.8	5.0
FY2019	3.22	1.86
FY2018	1.28	0.64

We can see the NPA figures stayed elevated in the last three fiscals. Let us see how that affected profitability as part of our fundamental analysis of Yes Bank.

Return Ratios: RoE & RoA

Return on equity (RoE) and return on assets (RoA) are two preferred ratios for assessing a bank’s profitability. We are familiar with the RoE already. RoA or return on assets is the after-tax income divided by its total assets. Since banks are overly leveraged, even an RoA greater than 1.5% is considered healthy.

The table below shows the recovery in the return ratios of Yes Bank. Take a look at how sharply the RoE fell to a negative of 81.8% in FY20 as the company provisioned a lot of bad loans.

Fiscal Year	RoE (%)	RoA (%)
2022	3.2	0.4
2021	-11.4	-1.3
2002	-81.8	-5.1
2019	6.5	0.5
2018	17.7	1.6

Advances Portfolio & CASA Ratio

One thing that brought Yes Bank down was the share of the riskier corporate loans in its loan book. Corporates accounted for a total of 68% of the total advances in FY18. Since the fallout, the bank has worked towards the granularization (or diversification) of its asset book. 

After Q3FY23, the share of corporates in the loan book stood at 29% while the retail and MSME had 71% share.

The CASA ratio of the bank still needs to improve saying it has to attract more deposits from the savings account and current account holders. This is because a bank has to pay lower interest to these two customer segments as compared to the term-deposits ones.

The graph below highlights the advances breakdown and CASA ratio of Yes Bank.

Yes Bank – Future Prospects & Risks

So far we only looked at the past results of the stock as part of our fundamental analysis of Yes Bank. In this section, we briefly cover what lies ahead for the stock and its investors.

Risks

1. After the recent Bombay High Court order on AT-1 bonds, there is a contingent liability on Yes Bank to the extent of Rs 8,450 crore till RBI and the bank management appeal against it in the Supreme Court.
2. The lock-in period for the investors that bailed out Yes Bank is set to expire in March 2022. Usually, when large investors offload their stakes, the stock prices fall sharply.
3. In the aftermath of the fallout, other banks such as IDFC First Bank quickly gained market share from Yes Bank. Furthermore, the banking industry has become very competitive over the last two years.

Prospects

1. CARE upgraded the rating of Yes Bank to A- from BBB+ earlier with a positive outlook stating that the bank has turned stable.
2. Recently, the bank sold its stressed assets of Rs 48,000 crore to J.C. Flowers Asset Reconstruction (JC Flowers ARC) for a consideration of Rs 11,183 crore to clean its books. Additionally, it acquired a 9.9% minority stake in the ARC with plans to purchase a further 10% holding.
3. With the capital raise and strong asset quality, the bank seems to be well positioned to capture its market share back in the coming years.

Yes Bank – Key Metrics

Let us take a quick look at the key metrics of the stock.

CMP	₹16.45	Market Cap (Cr.)	₹49,000
EPS	₹0.35	Stock P/E	55.7
Face Value	₹2.0	Dividend Yield	0.00%
RoA	0.4%	RoE	3.2%
Promoter Holding	0.0%	Book Value	₹13.5
NIM	2.3%	Price to Book Value	1.30
GNPA	13.9%	NNPA	4.5%
LCR	126.8%	CAR	17.4%

In Conclusion

We are now at the end of our fundamental analysis of Yes Bank. While the financials of the bank have definitely gotten better in the last three years, the risk still hangs with intense competition from other banks. It will be interesting to see how the bank performs under the new owners. 

Do you think it will be able to earn back its reputation and deliver good returns for the shareholders in the future? How about you tell us your opinion on the stock in the comments below?

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