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Macquarie says got Yes Bank call all wrong; double-downgrades bank's stocks, cuts target price by 40%

FP Staff
Yes Bank is part of a group of lenders to debt-ridden Jet Airways, which was forced to ground all flights earlier this month after it ran out of funds

Australian brokerage Macquarie has double downgraded Yes Bank stocks, according to media reports.

The brokerage firm has downgraded the stock to 'underperform' and cut target price by 40 percent to Rs 165, which is one of the lowest, a report in The Economic Times said.

Yes Bank reported a net loss in the quarter ended March 2019 on the back of spike in bad loans. The company reported quarterly loss of Rs 1,507 crore compared to Rs 1,179.44 crore in the quarter ended March 2018. Net interest income (the difference between interest earned and interest expended) grew 16.3 percent year-on-year basis to Rs 2,506 crore.

Macquarie has admitted to overlooking the risks from the structured finance business of Yes Bank and has downgraded the stock by a full two notches.

Citing the management commentary following the bank reporting its first-ever loss of a whopping Rs 1,506-crore for the March quarter under new management led by Ravneet Gill, the brokerage also flagged concerns on the fee income and the retail franchise of the fifth largest private sector lender.

The bank led by Rana Kapoor, who was forced out by the Reserve Bank of India (RBI) earlier this year for reportedly under-reporting bad loans and for poor governance standards, had booked a net income of Rs 1,179 crore in the year-ago period.

"We must eat the humble pie today and admit we underestimated the risks in structured finance. We got the call wrong," Macquarie said in a note on Monday, adding over the past eight years, it felt the bank can thrive in a risky business like structured finance.

The brokerage also announced a double-downgrade of the Yes Bank stock to 'underperform' and also massively slashed the stock price a low Rs 165 over the next 12 months, as against Friday's close of Rs 237.40.

The bank reporting a three-times increase in BB-rated and below accounts despite a higher slippage of Rs 3,408 crore in the quarter is a negative surprise, the brokerage said, adding the sharp decline in fee income due to changes in accounting practices is also a concern.

Moreover, the new chief executive Ravneet Gill's revelation that only 30 percent of its 1,100-odd branches are profitable further dampens the fundamental view on the bank, the brokerage said.

The Yes Bank team has guided towards a watchlist of Rs 10,000 crore, credit costs of 1.25 percent down from 2.2 percent in FY19 and a 20-25 percent loan growth led by retail and small businesses apart from a 50 percent decline in corporate fee in the next three years, the brokerage explained for its view on its once-top pick stock.

The brokerage said the experience of Axis Bank, where the actual slippages came in at 1.2 times the original guidance, is among the factors making it more nervous in regard to Yes Bank.

A media report Monday had said more analysts expect pressure to mount on the Yes Bank stock Tuesday because of the poor numbers reported Friday.

On Friday, the bank said it made higher provisions for possible reverses, including a massive Rs 2,100-crore contingency reserves, leading to the massive loss and said had it not been for a Rs 831-crore write-back, it would have reported higher losses for the March quarter.

The bank also saw an almost ten-times spike in provisions to Rs 3,661 crore from Rs 399 crore in the year-ago period. This includes a contingent provision of Rs 2,100 crore on a Rs 10,000-crore exposure to potentially stressed assets in real estate, media & entertainment and infra sectors, which stands at risk, the management told analysts on a concall.

Overall slippages jumped to Rs 3,481 crore, including Rs 552 crore to Jet Airways and Rs 529 crore for the bankrupt infra lender IL&FS. The gross non-performing assets ratio more than doubled to 3.22 from 1.28 in the year-ago period and 2.10 in the preceding quarter. It has a 7 percent exposure to the commercial realty sector, which is facing troubles.

The bank also said its credit costs jumped to 2.19 percent due to the additional provisioning.

--With PTI inputs

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