Yes Bank - Will it really turnaround?

Yes Bank - A Turnaround Candidate?

• The recent rally in the stock price of Yes Bank has confused many people. The Yes Bank stock has went up 51% since the past one year and has outperformed the Banking index by 28% and its peers too by a huge margin.

•  Is the bank really going to turn around after the massive downfall post late 2018?

• Would it really be able to compete against other banking giants like HDFC Bank, ICICI Bank, Kotak Mahindra Bank, State Bank of India and others?

• Will the management execute their plans well or it would be yet another "pump and dump" type move for retailers?

Well, I've tried answering some of these questions below, hope you find this helpful :)

About Yes Bank

• Lets start from the start and try give context to people who don't know much about the banks. A short summary about the company.

• It is a private sector bank which started operations in 2004. They saw amazing growth during the years from 2004 to 2018 in corporate banking. But the problem was their underwriting practices which were really bad and below par level for many.

• This then became the main reason behind erosion of capital, outflowing deposits and profitability becoming weaker and weaker as time passed by. Watching this, The Reserve Bank of India (RBI) in March of 2020, imposed a moratorium and ordered re-constructure or re-structure of the bank. 

• The people who were shareholders on 13th March 2020 were then informed that they are not allowed to sell more than 25% of the shares which they hold. This lock-up would be for a limited amount of time and would end after 3 years which is 13th March 2023

• This lock-up period might cause some downside in the share price near that time due to the increase in supply of shares. But anyways, we can only predict. We don't know how conditions would be that time. They might be completely different than what they are right now literally no one knows except the market itself.

Yes Bank Shareholding pattern as of September 2022

Key events post the disaster

• Board of Directors in Yes Bank on 29th of July 2022 approved to raise capital of Rs. 89 billion (on a preferential basis) to Carlyle and Advent International which are two equity players globally. 

• RBI too then gave approval but it was a conditional regulatory one allowing both the players to acquire a 9.99% stake each of Yes Bank.

• The bank also sold their stressed assets worth Rs. 480 billion which it had identified to JC Flowers ARC. This sale resulted in de-bulking of assets from the bank's balance sheet. 

• After the deal is done, GNPL of the bank would be below 2% with NNPL also going down around 1%.

What did the new management do?

• The new management increased Yes Bank's focus on segments like MSME and retail. This can be said by looking at the fact that their share was 44% in 2020 while the same comprises of 66% now. 

• The new management also worked on bringing down the exposure in inferior corporate sector and let the book be exposed to only high quality businesses. 

• They also played a major role in the bank's return to profitability after a series of violent losses in 2020 as well as 2021. 

Focus on retail and MSME segment

What's the future outlook of the Bank?

• A little about the whole Indian Banking sector first :- In India, a capex boom is going on currently as the factors from both demand side (high capacity utilization, PLI scheme, corporate tax cuts, shift to multi polar world) as well as the supply side (balance sheets of banks and corporates) have shaken hands. 

• Expect Yes Bank's RoA to improve and move up to 0.7% in 2025 before it finally reaches 1% in 2026. This, if happens, would be driven by high core fee growth, small credit costs and higher margins.

• Expectations for RoE would be 7% by 2025 and hopefully touch 10% during or after 2026.

• As the bank is now focusing more and more towards MSME and retail segments under the new management's guidance, it would lead to high costs in sourcing loans as seen by 7% of the total operational expenditure in financial year 2021 to 11% in the first half of financial year 2023. 

• This is expected to remain stable considering the plan and determination of the management on growing these segments currently as much as possible.

• There are some favorable tailwinds from the macro side which would help Yes Bank expand and grow faster in MSME and retail segments. 

• Expect a loan CAGR of 25% in the above two segments during financial years 2023 to 2025 and an overall loan CAGR of 20% during the same period.

• Expect the corporate book to achieve a CAGR of 8% during FY23 to FY25.

Yes bank :- Financials

Main challenges for Yes Bank

• Due to trust being one of the major drivers when it comes to banking, Yes Bank would have to pay a high premium compared to other giant banks so as to gain some deposit market share. Otherwise people would keep depositing their money in other banks only.

• Yes bank also has no pricing power in the segments where it is focusing now (MSME and retail). This is plainly because of so much competition available in the market. There are a lot of options which is beneficial for the customer, but not for the providers.

• During the phase of Yes Bank's strong growth (FY10-18), it used to have RoA of 1.6% because at that time the competition wasn't much as the SOE banks and giant private banks were going through the NPL cycle benefitting the medium players who didn't have much size like Yes Bank.

• But, the current cycle would be very different from the previous one and the competition will further increase in both retail assets as well as liabilities.

What would happen to Yes Bank share price?

• It should go up if the management walks their talk and executes the plan nicely. If not, we can see some further consolidation or even downside if some other error happens. With such huge amount of float available, its really hard to tell about Yes Bank share price today or tomorrow or any time in the future.

Weekly chart of Yes Bank NSE

• Also, this counter is one of the most volatile ones among the listed stocks. Yes Bank news keeps floating everywhere and affects its prices in NSE and BSE pretty frequently bringing in turbulent moves with them.

• So, this marks the end of this blog. A little disclaimer :- This is an informational blog for educational purposes. No buy or sell recommendations have been given here & this one isn't any as well. Please treat this as an medium to expand your knowledge only. For expanding your wealth, you should take decisions on your own. With that,

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