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The Reserve Bank of India’s firefighting measures to save the rupee will have a direct bearing on the business prospects of YES Bank in the coming quarters. The bank's shares fell 12.6% on Wednesday, even after it reported a 38% year-on-year increase in net profit, 39.6% increase in net interest income and 24.3% growth in advances.
Analysts believe that the liquidity squeeze and increase short-term rates will have a direct impact on the bank’s growth and profitability.
The RBI’s tightening measures will impact the bank’s loan growth, as it is reliant on wholesale funds as the low cost current account savings account (CASA) deposits account for 20% of deposits. Additionally, 43% of the bank’s deposits are in the range of three months to one year.
From this month, RBI has put a cap on borrowing under the liquidity adjustment facility (LAF) window at 0.5% of net demand and time liabilities. YES Bank will be worst hit by this as it borrowed six% of its NDTL in FY13. The bank will have to de-leverage in the coming quarters and go slow on advances.
The increase in cost of funds will also have an impact on asset quality, if the bank passes on the increase in costs. In the first quarter, the bank’s cost of funds has declined 70 basis points in Q1FY14 to 8.3%. If cost of funds rise, then yields on assets would have to go up too from 12.8% in Q1. At such high rates, the quality of borrowers would be compromised, believe analysts.
Growing the loan book in these circumstances would be rather tough for YES Bank. Emkay Global has revised YES Bank’s net interest income estimates downwards by seven% each for FY14/FY15 each.
The brokerage also expects net interest margins too are expected to contract by 13 basis points over FY14 to 2.4% before reversing back to 2.6% levels in FY15.
In the coming quarters, the bank will not even have the cushion of treasury gains as bond yields have hardened and are not likely to ease soon. In the first quarter, the bank reported Rs 440 crore as other income, which is income from operations in the financial markets and financial advisory.
Ishank Kumar, banking analyst at Religare Capital Markets, says: “Future profitability could be impacted due to sharp increase in short-term rates and rise in corporate bond yields.” In the given circumstances, it will be imperative for the bank to raise capital.
