Yes Bank first casualty in RBI’s rule to pull out bad loan skeletons
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Past mistakes tend to come back to haunt you at the most inopportune moment, and Yes Bank’s financial results are a case in point. The private lender reported a 169% rise in gross bad loans for the fourth quarter and a resultant 66% increase in provisions. Recall that the March quarter of 2015-16 was the worst in terms of asset quality for banks.
The stock has gained a massive 39% so far this year, fuelled partly by the news and then subsequent success of its qualified institutional placement (QIP). This impressive rise now seems like an overkill and analysts are already expecting a correction.
In Yes Bank’s case, the indiscretion pertains to a single borrower which the bank should have labelled as non-performing asset (NPA) in the previous financial year. What made the lender do it now is the new rule put in place by the Reserve Bank of India (RBI) on Tuesday that mandates banks to disclose deviations in the asset quality assessment of the central bank and the lender in question.
If the mandated provisioning by the RBI exceeds 15% of published profit after tax of FY16 or additional gross NPA exceeds 15% of the published figure, the lenders have to disclose the same in full in their financial statements for FY17. If the RBI’s asset quality review brought to light a massive pool of decaying loans, Tuesday’s rule makes sure any residual bad loan skeletons come in full view of investors.
In Yes Bank’s case, this meant an additional slippage of Rs911.5 crore in the March quarter. But the lender still saw healthy profit growth of 30% from the year-ago period because of a sustained robust growth in core income. The bank’s core metrics including loan growth, net interest income and even net interest margin held up. This perhaps was the saving grace of the quarterly results.
The stock trades at a price-to-book value multiple of 3.12 of the estimated earnings of FY18 and for these valuations to be justified, the bank will have to show a quick turnaround in its asset quality.
Ever since RBI triggered widespread recognition of stressed loans through its asset quality review (AQR) in 2015, the unease that banks have not revealed the rot in loan books in its entirety has set in. The quarterly results of Yes Bank deepen this unease.