Sell Yes Bank Ltd For Target Rs. 17 By Emkay Global Financial Services Ltd
Will SMBC’s entry spark a sustainable turnaround?
We met Yes Bank’s CFO Niranjan Banodkar, for business updates and assessing whether SMBC (Sumitomo Mitsui Banking Corp)’s entry into Yes as a majority shareholder will expedite the long-awaited turnaround of the bank following its RBI-led restructuring. KTAs:
Retail asset strategy has met with limited success
Post RBI restructuring, Yes Bank pivoted from a corporate heavy portfolio (68-70%) toward retail (49%) and Commercial Banking/SME (25%), to avoid lumpy corporate asset quality shock and driving better RaRoC; however, it has met with limited success, with retail still in loss. Its retail portfolio has been shrinking for the past few quarters, as asset quality concerns have surfaced (GNPA inched up, to 2.3% in Q1FY26), mainly led by its overdependence on DSAs for sourcing and a relatively risky portfolio. The bank has contained its new home loan disbursements, while de-growing its PL as well as VF book, albeit still aggressively growing its card book. The management has guided for retail growth of ~8% in FY26 and double-digit growth only from FY27. However, commercial banking remains a growth driver for now (up 19% YoY) which we believe could come under pressure amid the rising asset quality risk. Overall, the bank expects loan growth to be sub-par at 8-9% in FY26 (up from 5% now), moving to the low-teens in FY27.
SMBC’s strategic entry could trigger one more reset on the asset front
SMBC has received regulatory approval for acquiring 24.99% stake in Yes Bank; of this, it has already acquired 20% from a slew of banks, with the incremental 4.99% stake likely to be acquired either via secondary purchase or during future capital raise (CET 1 being sub-optimal @14%). Though SMBC will not have ownership control, it will have a say on the Board (through its 2 nominee directors) in the appointment of the new MD & CEO, to replace Prashant Kumar. While SBI’s entry into Yes Bank has helped Yes stabilize its deposit base, we believe SMBC’s entry into Yes could potentially lead to one more reset on the asset front (mainly retail/SME), apart from access to sustained source of capital, enhanced governance, management rejig, and possibly some portfolio clean-up.
Core-profitability remains weak; management transition to be key monitorable
Yes Bank’s core-profitability (PPoP at 0.9% of assets) remains sub-par, given the slower growth, lower margin (partly due to drag from industry’s high RIDF pool at Rs370bn/15% of loans), and higher operational cost. However, higher SR redemptions/provision reversal continue to support profitability; thus, the bank aspires to achieve 1% exit RoA in FY27 (vs 0.8% now), subject to no major asset-quality disruption. We revise up our earning estimate by ~7-15%, building in higher SR income and some cost rationalization, as Yes shifts toward branch-led loan sourcing; we expect RoA of 0.8-1% over FY26-28E. Despite our estimate revisions, we retain SELL on the bank and our TP of Rs17, given rich valuations (1.2x FY27E ABV) relative to core profitability. However, a potential leadership transition, coupled with strategic influence of SMBC, will be a key monitorable as it could grant another opportunity to Yes for attempting a long-awaited turnaround.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
