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Buy YES Bank, target Rs 300: Phillip Capital (India)

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Phillip Capital (India) has a buy call on YES Bank with a target price of Rs 300.

The current market price of YES Bank is Rs 222.35.

Time period given by the brokerage is one year when YES Bank price can reach the defined target.

Investment rationale by the brokerage-

NIL divergence; asset quality concerns alleviate: Yes bank in its press release on 13th Feb 2019 reported that it has received the Risk Assessment Report for FY2018 from RBI. The report observes NIL divergences in the Bank’s asset classification and provisioning from the RBI Norms for FY2018. We believe this is a big positive for the banks as this allays concern related to NPA recognition process followed by the bank. Bank in its 3Q19 earnings had given credit cost guidance of 80bps for FY19 (including any further provisioning related to IL&FS group), we believe this guidance is more realistic with overhang due to divergence is now over (Bank had credit cost of 69bps as of 9MFY19).

Focus to now shift on growth: We expect the bank’s focus to now shift towards growth. Bank had postponed its capital raise plans and curtailed its loan growth due to uncertainties related to top management and asset quality concerns. Bank’s strategy had shifted to capital preservation and growth was based on prioritizing new business and asset sell down. As a result bank loan book growth declined from an average c.10 per cent QoQ to c.2 per cent in 3Q19. With uncertainties over, we would expect the bank to be in a better position to raise capital now and which will bring back the accelerated growth trajectory.

New CEO to Join in March 2019: Mr Ravneet Singh Gill has been appointed as new MD & CEO of the bank and is expected to join in March 2019. We would expect him to lay down future growth strategy for the banks including any plans for capital raise.

Outlook and valuation: Announcement of Mr Ravneet Singh Gill as New MD & CEO and Nil divergence in RBI’s AQR report is positive for the bank as it will address uncertainties related to top management and asset quality. We believe the focus will now shift towards future growth which will depend on the bank’s ability to raise capital. With RBI’s AQR report out we expect banks to start focusing on raising capital once new MD & CEO joins on March 1, 2019. However, we have not factored in any capital raise as we would wait for new CEO strategy and hence model a moderate loan book growth of 23 per cent/19 per cent for FY19/20 and its impact on fee income. Moderating credit growth coupled with slowing fee income would keep return ratio (RoA) in the range of 1-1.1 per cent in the medium term. We maintain BUY owing to inexpensive valuation and higher than industry average credit growth with a target price of Rs 300 translating into an implied P/adjusted BVPS of 2.0x FY21 (adjusted BVPS of Rs 150).

Source: Economic Times