YES Bank Q2 Results: Historically strong recoveries from RBI divergences; retain LONG on strong core performance | Financial results | Outlook | Target price reduced | NII growth improves |

YES Bank (YES) reported a 25% yoy growth in its 2QFY18 PAT to Rs 10bn (EE: Rs 10.2bn) with NII/non-interest income growth of 30.4%/40.6% yoy. NIM was steady qoq at 3.7% while CASA/C/I ratio improved to 37.2%/39.2% vs. 36.8%/42.1% in 1QFY18. Elevated provisions (+177% yoy) include Rs 4.43bn towards divergence provisioning. For the divergence of Rs 133.5bn over the past three years, NPLs are contained at ~16% with ~41% recovered and ~30% upgraded. We broadly retain our FY18/FY19 estimates with a marginal 5bps increase in FY18E provisions/avg. loans to 94bps. Retain LONG with a ERoE-based Sep’18 TP of Rs 395 (Rs 400 earlier) corresponding to 3.5x/2.9x Sep’18/ Sep’19 ABV of Rs 113/Rs 137.

Quantum of FY17 GNPA divergence with RBI significant at Rs 63.6bn: Post FY17 risk- based supervision, the RBI identified a divergence of Rs 63.6bn/Rs 48.2bn/Rs 15.4bn in the bank’s GNPL/NNPL/provisions. Of the total GNPL divergence in FY17, Rs 16.9bn was repaid, Rs 4.6bn sold to ARCs, Rs 12.2bn downgraded to NPLs and Rs 29.8bn upgraded to standard post board and statutory auditors approvals. Over the past three financial years’ one asset quality review and three risk-based supervision, total divergence has been Rs 133.5bn, of which ~41% has been recovered, ~30% upgraded to standard, ~13% sold to ARCs while ~16% continues to be NPLs. Management remains confident on its credit underwriting and transaction structuring norms, and believes the divergences are primarily due to the RBI taking a systemic view on exposures.

GNPL/NNPL increase to 1.8%/1.0%
: Non-divergence slippages inched up to Rs 7.7bn, leading to non-divergence GNPL/NNPL ratios of 1.0%/0.52% with overall PCR at ~43.3%. YES remains watchful of its non-renewable power sector exposure (~3.4%), but is comfortable with its iron & steel (2%, ‘A’ or above rated 1.6%) and telecom (3.9%, ‘A’ or above rated 3.7%) exposures. Overall, ~76% of corporate loans are rated ‘A’ or above. Within IBC-referred accounts, YES had exposure to two in the first list and seven accounts in second list, aggregating to Rs 14.34bn. Management maintained its FY18E credit cost guidance at ~70bps.

PPOP growth strong at 37.6%: Total income grew 34% yoy aided by loan growth of 35% yoy, NIMs of 3.7%, CASA of 37.2% and an improvement in the C/I ratio to 39.2%. Consequently, PPOP growth was strong at 37.6%. Within loans, share of corporate banking stood at ~67.4%, medium enterprises at 9.9% and SMEs at 11.4%; retail banking advances increased by 78% yoy to 11.4% of loans.

Key risks:
A material slowdown in the economy adversely impacting loan growth and asset quality, and a slowdown in CASA accretion remain key risks.
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