Kitchen sinking spooks YES Bank; has stock found a bottom?

NEW DELHI: The new CEO’s ‘kitchen sinking’ caused YES Bank shares to tank 30 per cent on Tuesday, wiping out nearly Rs 16,500 crore of investor money.Has this made the stock find a bottom? The jury is still out.The private lender on Friday posted a Rs 1,507 crore loss for March quarter compared with Rs 1,180 crore profit posted for the year-ago period.The bank made some Rs 3,662 crore non-tax provisions, over nine-times the Rs 400 crore provided for the year-ago period and nearly seven times the Rs 550 crore budgeted for December quarter 2018. Gross NPAs rose to 3.22 per cent of total loans from 2.10 per cent in December quarter. (Read more)The maiden quarter loss for the lender surfaced in new CEO Ravneet Gill’s first quarter at the helm. At 11 hours on Tuesday, the stock traded at Rs 175 on NSE, down 26 per cent.‘Kitchen sinking’ is a term used to describe a new chief executive’s front-loading all bad news to gain flexibility over the future corrective actions for the business.India’s banking industry has repeatedly witnessed such instances in recent years, including at the country’s top lender State Bank of India.In December quarter of 2017, SBI shocked the Street with a Rs 2,416 crore loss immediately after Rajnish Kumar replaced Arundhati Bhattacharya as Chairman of the largest public sector bank in October 2017. The bank attributed the loss to a big spike in provisions due to bad loan divergences and treasury losses. (Read More)SBI Other lenders, too, have witnessed such actions following appointment of new CEOs.The YES bank management, however, said it was not kitchen sinking, as the situation post September led to more NPA recognition. It denied the same had anything to do with the change in leadership.Analysts warned that the clean-up process at the private lender may not be one off. It might be a long-drawn process with high execution risks. Hence, upside for the stock looks capped until further clarity emerges in the coming quarters, they said.“When a clean-up process starts, as seen in Axis Bank, ICICI Bank and some of the PSU lenders, it often lasts multiple quarters. It is never a one-off thing. Many investors used to buy YES Bank because of its strong growth. That has moderated now, from 40-45 per cent growth, investors will have to be content with 20-25 per cent growth, which may be disappointing to some,” said Ajay Bodke of Prabhudas Lilladher. Bodke said capital raising will now become crucial for the bank to drive the new CEO’s plans. And with the sharp drop in stock price, the dilution will have to become larger, as it will require the bank to issue more shares for the same amount of capital.Brokerage Sharekhan said the bank may need to raise capital in the near to medium term, considering its quarterly burn rate. As of March end, YES Bank’s capital adequacy stood at 16.5 per cent and Tier-1 ratio at 11.3 per cent.“In the near term, changes in business model – liability-led, lesser dependence on corporate fees, more granularity in liabilities profile and calibrated growth – may moderate growth and return ratios. Thus, the stock’s upside, if any, will be limited,” Sharekhan said.YES Bank, on its part, insisted the contingent provisions it made for the quarter, which led to the first-ever loss, and the conservative accounting it adopted, have been an attempt to win back investor trust. It should in no way should be seen as kitchen sinking, it said.CEO Ravneet Gill has set a long-term return on asset (RoA) target of 1.5 per cent for the long run, and 1 per cent at least for a couple of years. The private bank has projected loan growth at 20-22 per cent.The targets are realistic, said JM Financial, given the headwinds the bank has faced. They reflect a more sustainable profitability trajectory. This brokerage is building in a loan growth of 20 per cent CAGR over FY19-21E and provisions of Rs 7,400 crore in FY20/FY21E.Foreign brokerage Macquarie said it would be a long road to redemption for YES Bank. The bank has not just survived, but thrived in a risky business segment like structured finance over the past eight years, it pointed out.“There was scepticism at times but RBI’s clean chit in FY18 divergence audit seemed to ratify our understanding of the business model,” Macquarie said.As such, “The new CEO’s flag of a three-times QoQ increase in ‘BB’ and below-rated accounts despite aggressive slippages in Q4FY19, comes as a material negative surprise. In addition, flagging off of aggressive accounting practices in fee income and weakness in retail franchise further dampen our fundamental view on the robustness of the business model,” the foreign brokerage said.YES Bank’s operational policies, too, have been called into questions in recent times, with banking regulator RBI expressing unhappiness over the same. Some analysts said a significant near-term worry arises from the collapse of fee income and higher credit cost. If more risks arise from unidentified stress, due to a drop in net interest margins (NIM) on higher interest reversals and if the stress book turns NPAs, it will lead to an infinite loop of lower return ratios for the lender in the medium term.Kotak Securities estimates higher credit costs for the bank book in the near term, as weak RoEs and low Common Equity Tier-I (CET-1) would make the transition painful in the medium term. “This makes it a too risky bank today even if the new strategy is acceptable,” it said. YES Bank is expecting a spike in credit costs, including contingency provisioning, by up to 550 bps on an annualized basis. The management has guided for up to 125 bps of credit costs in FY20E followed by a normalising trend in FY21E.Kotak Securities said there have been instances in the past of bank managements increasing their guidance on stressed loans many a time, as some of the planned exit strategies on corporates, which are not classified as stress today, have not fructified. “Also, there remains a tendency to remain optimistic on potential cash flows of a few large exposures, which often do not materialise,” it said. "It is quite likely that the default risk for YES Bank is lower. But the bank will still need to make higher provisions in the interim to meet the regulatory requirements and this could have an impact on Tier-1 ratios,” the brokerage said.YES Bank management, meanwhile, has talked about shifting its strategy to lower risk profile, which is a positive, said analysts. “A change in management should come with change in business practices or better regulatory compliances. Why would investor community appreciate a change in management if the same old practices are followed?,” asked Siddharth Purohit, banking expert at SMC Global.That said, YES Bank clean-up process is starting at a time when ICICI Bank and Axis Bank are almost through with their NPA clean-ups. The two peer lenders had in the past identified stress accounts much before the change in managements. 69106622 69089521 69089813

from Economic Times http://bit.ly/2XT8Gul