YES Bank sees Macquarie, BofA-ML, Edelweiss reassurance after UBS downgrade

UBS had downgraded the stock to 'Sell' with a price target of Rs 740 citing asset quality concerns

YES Bank has seen several reassurances from domestic and global brokerages after UBS, a global research and brokerage firm, downgraded the stock to ‘Sell’ with a price target of Rs 740 (from Rs 1,000 earlier).

After dipping nearly 8% to Rs 797 levels on Wednesday, the stock opened at Rs 809 and hit a high of Rs 820 on the Bombay Stock Exchange (BSE) on Thursday.

According to the 7 July UBS report titled ‘India Banking & Finance Sector: Deep dive into lending practices—differentials not priced in’, YES Bank had one of the highest exposures to stressed assets at 125% of its net worth.

“Our study suggests an 85% increase in estimated loans to our sample of potentially stressed corporates since FY12, with YES Bank (3x) and ICICI Bank (2x) showing the strongest growth. YES Bank (YES), Punjab National Bank (PNB) and ICICI Bank (ICICI) seem to have a relatively higher share of loan approvals to potentially stressed companies (as a percentage of loans),” UBS said in the report.

That apart, UBS also suggested that the bank had not factored in an increase in credit cost. The revision in price target comes on the back of UBS raising the credit cost assumptions by 34-41 basis points (bps) and cutting the FY16/FY17 earnings estimates by 15-16%.

Following the UBS report, several domestic and foreign brokerages have reposed faith in the bank / stock.

Macquarie, for instance, has maintained an outperform rating on the stock with a 12-month price target of Rs 1,020 and cites its interaction with the management.

“Many loans have run off; in some cases they have not even been disbursed as the exposures mentioned in the report are based on loan sanctions (approvals) and not loans disbursed. In many cases even if the loans were run down or sold, the charges are not released immediately. In fact, in terms of RWA (risk-weighted asset) to total assets, YES Bank is even better than IndusInd and ICICI Bank,” the report says.

Veekesh Gandhi and Rajeev Varma, analysts at Bank of America- Merrill Lynch (BofA-ML), too, have maintained a 'BUY' rating on the stock with a target proce of Rs 1,100. They suggest that the bank (after HDFC Bank) has built a very strong contingent buffer to cushion any negative earnings impact arising from sudden spikes in credit costs. This contingent buffer, according to the report, currently stands at 50 bps of loans over and above 72% specific provision cover.

"While corporate heavy book, Yes Bank’s exposure to project finance is less than 5% of loans across sectors and in our view, with contingent buffer this should cushion earnings," they add.

Analysts at Edelweiss also feel that the issues seem to have been exaggerated and perceives the price correction as an opportunity to accumulate. "The bank is trading at 2.1x FY17E P/ABV, which we believe is unwarranted given structural levers in place for RoA expansion. Maintain ‘BUY’," they suggest.