Hela February 15, 2019

The Yes Bank stock is up 26 percent on February 14 and the reaction is not unexpected. After ending months of speculation, the bank received the audit report from the Reserve Bank of India (RBI) giving it a clean chit with no divergence.

While the incumbent management had been guiding at modest credit cost, thereby expecting minimal divergence, the RBI report is a strong signal that the process of recognising toxic asset at Yes Bank is indeed to the satisfaction of the regulator.

In recent times, investors have seen better and upfront recognition of stress from Yes Bank. For instance, slippages that shot up in FY18 to Rs 8,215 crore due to RBI’s Asset Quality Review observation and remained high in FY19 as well. In the first three quarters of current fiscal, total slippage (i.e. recognition of assets that have turned bad) was high at Rs 4,489 crore as the bank recognised a large part of the stress in its book upfront.

The bank has a funded and non-funded exposure of Rs 2,530 crore and Rs 88 crore to the Infrastructure Leasing & Financial Services (IL&FS) group, respectively. Close to 76 percent of the exposure has turned into a non-performing asset (NPA) in the December quarter.

The total stress in the book, however, is still a manageable 1.98 percent of total assets, including IL&FS. With this key corporate governance issue largely addressed, the management can now look forward to the journey ahead under the new CEO Ravneet Gill. This should also pave the way for capital raising and remains a strong re-rating trigger in our view.

We had already turned positive on Yes Bank as the risk-reward was turning favourable. RBI’s audit report only bolsters the case. Even after the sharp rally, our stress case valuation of the bank at 1.7 times FY20 estimated book offers strong upside.