YES Bank continued to deliver strong traction in loans, healthy deposit growth and improving margins in the latest June quarter. But for investors, the bank’s well-rounded core performance, amid headwinds in the banking sector, is not what brings good tidings.

Concerns over the sharp rise in its gross non performing assets (GNPAs) during the March quarter (owing to one account), as also the sharp divergences in asset classification and provisioning from the RBI norms (pertaining to FY16), had dampened investor sentiment.

With the bank already having stated that it has fully recognised these divergences in FY17, investors have been keenly awaiting the tally of bad loans for the June quarter. Much to investors’ cheer, the bank did not disappoint and reported a lower GNPA figure in the June quarter, with around 60 per cent recovered from the one account that had slipped to NPA in the March quarter. GNPAs are down from Rs 2,018 crore as of March 2017 to Rs 1,364 crore as of June 2017.

Asset quality worries

The RBI had issued a circular in April which required banks to make disclosures, during instances of material divergences in banks’ asset classification and provisioning from the RBI norms.

Few private lenders such as ICICI and Axis Bank, along with YES Bank had reported sizeable divergences. But for YES Bank the proportion of divergences were among the highest.

In its annual report, the bank showed GNPAs worth Rs 748 crore in FY16. However, as per the RBI's assessment, the bank's bad loans were Rs 4,925 crore – a divergence of Rs 4,176 crore. This, the management, clarified had already been accounted for in FY17.

YES Bank’s sudden increase in NPA in the March quarter was due to one account with gross exposure of 0.69 per cent of loans (Rs 911.5 crore), pertaining to an M&A transaction in the cement industry (relating to Jaiprakash Associates that had sold its cement units to Aditya Birla Nuvo-controlled UltraTech Cement).

With the closure of the deal, the bank appears to have recovered 60 per cent of the amount in the June quarter, and hopes to recover more in the September quarter.

The bank has however chosen to retain the entire Rs 227 crore provisioning made for the account in the March quarter. The provision cover that had slipped to 46.9 per cent in the March quarter has inched up to 60 per cent levels in the June quarter.

Of the 12 accounts that have been referred by the RBI to the National Company Law Tribunal, YES Bank’s exposure is on two accounts amounting to Rs 343 crore or 0.24 per cent of loans. The bank stated that it has made provisions proactively on such exposures ahead of the RBI prescribed requirement.

While much of the asset quality pain appears to have receded, the coming quarters will need watching.

Core performance as usual

YES Bank’s core performance, as always has been on a strong footing. The loan growth stood at 32 per cent y-oy in the June quarter, far higher than the muted 5 per cent growth at the system level. While the bank’s relatively smaller base has helped to some extent, the growth is nonetheless noteworthy.

The new marginal cost of funds based lending rate (MCLR) framework introduced by the RBI last year has helped the bank offer competitive rates and tap into opportunities in the large corporate segment. The corporate book contributes the chunk -- 68 per cent of total loans.

YES Bank’s strong return on equity (ROE) should continue to keep its growth in good stead. The bank’s ROE, which has been in the 17-25 per cent range in the last couple of years, has kept the growth in capital intact through internal accretion.

Aside from the strong growth in loans, improving low cost current account savings account (CASA) ratio continues to aid margin expansion.

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