Higher NPAs hurt Yes Bank stock

Shares of Yes Bank on Friday fell 7.4% as many brokerages cut their target price after it reported a sharp increase in bad loans. In morning trades, the stock was down as much 10% as it witnessed a sustained bout of selling from investors.

Gross bad loans rose to Rs 2,720.34 crore as the end of September, up from Rs 916.68 crore a year ago and Rs 1364.38 crore a quarter ago. As a percentage of total loans, gross NPAs were at 1.82% as the end of September compared to 0.97% three months earlier.

The stock fell to Rs 299 a share, a four-month low and the stock has declined over 20% in the last two weeks as several broking houses changed their ratings from “buy” to “sell”. However, even after the fall, the stock is up 33% so far this year. The fall wiped out over Rs 10,000 crore in market capitalisation in a single day’s trade.

The increase in Yes Bank’s bad loans is as a result of Reserve Bank of India’s (RBI) supervisory assessment of its bad loans, over the above assessment made according to rules governing provisions. The central bank uses subjective parameters and uses its discretion to qualify more loans as bad, if it chooses so. Earlier this month, a similar action saw a steep rise an unanticipated rise in bad loans of Axis Bank, the third largest private sector bank. Later today, analysts expect a similar fate for ICICI Bank, which is slated to announce its results.

The central bank’s assessment of Yes Bank’s gross bad loans was Rs6,355.20 crore more than what the lender had reported at the end of March. Out of the total divergence as assessed by the central bank, only 1,219.4 crore were classified as non-performing assets (NPAs). Of the rest, 26.6% of loans were net payments and 47% of loans were upgraded as standard. Says a senior Yes Bank executive, who did not wish to be named: “The re-classification of certain loans as NPA by the central bank is a precautionary step but we are confident that many of these will turn in the short run.”

“The performance of the quarter is difficult to gauge in the context of the divergence exercise. If anything, it highlights that the underwriting of the bank is significantly different from other banks. Investors would need to continue to have faith that the bank would be in a position to recover loans from its delinquent borrowers even in a weak macro environment. We probably find such business models difficult to value at higher multiples even if the reported RoEs (return on equities) are closer to 20%. We prefer being conservative which the current valuations do not offer,” said Kotak Institutional Equities, in a report to its investors.

Firms like Macquarie has downgraded the stock to “neutral” from “outperform” and kept its price target at Rs340 a share. IDFC Bank was downgraded to “underperform” from “neutral” and lowered its target price to Rs270 a share from Rs309 a share. But, out of 52 brokers tracking Yes Bank stock on Bloomberg, only nine had asked investors to “sell” the stock, while a overwhelming majority recommended investors to “buy”.