Yes Bank’s growth story goes on but provisions are a red flag
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A glance at Yes Bank Ltd’s second quarter results should provide immense comfort to investors, with net profit growth sustaining above the 30% level, and both advances and deposits growing at a fast pace of 37.7% and 28.9%, respectively.
Profit growth was driven by not just non-interest income but also a 30.5% jump in its net interest income to Rs1,446.2 crore which is the core income a bank earns through lending. Margins too are stellar for the private sector lender, expanding to 3.4% for the September quarter, achieved by boosting low-cost current account and savings account balances by a massive 53.2% to form 30.3% of the total deposit base.
Clearly, Yes Bank seems to be getting it right on all fronts. Even asset quality, which looked like its Achilles heel due to its corporate-heavy loan portfolio, seems to be strong, with both gross and net bad loan ratios well below 1% of total advances. Credit costs at 11 basis points are perhaps the best in the industry.
But this is where it pays to dig deeper. Yes Bank’s gross non-performing assets (NPAs) have risen by 87% from a year ago, with bulk of the jump being in the March and June quarters following the Reserve Bank of India’s asset quality review conducted last year. Its net NPAs have more than doubled. The bad loan optics looks good simply because the lender has been able to grow its loan book at a scorching pace. Granted, part of the growth in lending is coming from the less risky retail book and this could keep asset quality from deteriorating. Nevertheless, corporates continue to have the lion’s share and not all sectors have turned around. Further, the bank has a high 9% exposure to the power sector that is still struggling.
But where bad loans have gone up, the bank has hardly beefed up provisions. Provisions rose just 56% even when bad loans surged 104% on a net basis. The management indicated that given a stable bad loan ratio, these provision levels would suffice. Low provisioning can mean that the lender is confident of keeping asset quality ship-shape either through higher recoveries or by keeping the run rate of its loan book growth intact. For the latter, the recent debacle in fundraising through a qualified institutional placement doesn’t bode well.
Yes Bank’s growth story is amply reflected in its stock’s benchmark-beating returns so far this year. But analysts suggest that the bank would need a boost to its capital to maintain its growth.