Q1 results: Yes Bank maintains its combination of high growth and low credit costs

Shares of Yes Bank Ltd rallied 3% on Wednesday following the June quarter earnings announcement, which was more or less in line with the estimates. Net profit grew over 27.7% to Rs.551 crore compared with the year ago period.

The positive stock reaction could be attributed to buying at lower levels after the recent sell-off.

Shares of Yes Bank had plunged sharply after UBS Global Research came out with a negative note on 7 July.

In the June quarter, Yes Bank has maintained gross bad assets at around 0.46% of the overall book. However, additions to bad loans cannot be ruled out in the coming quarters because it is exposed heavily to medium-sized companies which have a turnover between Rs.100 crore and Rs.500 crore and also because loans are growing strongly.

The management expects gross bad loans to rise to Rs.500 crore, with a marginal increase in credit costs, by the end of the fiscal year. In the June quarter, Yes Bank’s gross non-performing assets increased by 17% to Rs.368 crore compared with the January-March quarter. Total restructured advances increased by almost half to Rs.567 crore from the March quarter because of a couple of road projects that did not achieve closure.

Corporate banking accounts for 67.8% of the advances portfolio, up from 64.7% in the March quarter, at a time when most private banks are cautious in growing their corporate book. Overall, net interest income grew 42% from a year ago, helped by strong advances growth of 35%. Even deposits grew at a robust pace of 25%. Buoyant loan growth helped net interest margins expand to 3.3% in the June quarter.

Yes Bank’s liability profile is mostly wholesale in nature, which is slightly higher cost. Private banks like Axis Bank Ltd have a substantial portion of low-cost retail franchise. Also, while Yes Bank’s credit growth is strong, it is mostly from the corporate sector where credit risks are high, given the stresses in the economy. So far, the bank has been able to maintain high growth without credit quality coming under strain. But, in the current environment, it is a difficult act to maintain.

Yes Bank shares are trading at 2.1 times price to book for FY17. With their return on assets hovering at around 1.6%, the upside for the shares may be limited.