Excellent Report on Yes Bank By Stallion Asset- 21.06.2019

“Yes bank is the cheapest private bank & we find great Value in it” Said Every Research Report 6 months back. Why has suddenly Yes Bank gone from being a Value Stock to a Deep Value Stock, Even Axis & ICICI Bank faced NPA Problem & probably worse than this one in 2016 but both these banks are hitting New Life Highs, Can Yes Bank do the Same?

Well let me start this blog by saying that we at Stallion Strongly believe in a 8-10x leveraged Entity like a Bank, the bet is always on the Banker. After Banks were forced to reveal their real book from 2014, Yes Bank stood out as a ‘too good to be true case’. In FY2018 SBI Bank Reported NPA’s of 19.91% on Large Corporates Book Whereas about 24.44% NPA’s on Mid corporate book. Between FY2017 & FY2018 Axis Bank Reported a 28000 Crores Increase in Gross NPA’s mostly from its 1.5 Lakh Crore Corporate book i.e. Broadly indicating 19% of its Corporate book was under Stress. The Story was Similar for ICICI bank in FY2018 with Gross NPA’s of approximately 20% on its Corporate book.

While Other Corporate Banks were suffering Yes bank increased its advances from 55 Thousand Crores in FY2014 to 2 Lakh Crores+ in FY2018 (Thats a Sixer), not only that the NPA’s of Yes Bank for FY2018 was 1.3% & you might be thinking how is that even possible, probably Yes bank didnt have exposure to corporates, well that wasn’t the case infact 70-75% of total advances (Loans given out) of Yes bank were to Large & Mid Corporate.

Now we all know what has happen after that in FY2019, RBI asked Rana Kapoor to step down & he appointed Ranveet Gill as CEO. Just Incase you didnt know this but Rana kapoor is said to be one of the smartest bankers on Mint Street who recovered all his money from defaulters like Kingfisher & Deccan chronicle. Now coming to the New CEO, Ranveet Gill, he was working in Deutsche bank where ofcourse just like any other MNC bank in India majority of revenues comes from Fees business like custody & Forex.

Yes Bank Today- So what exactly is the Problem – Well a Bank is funded by 10-15% Equity & rest 85% is depositor’s money but when a loss comes, its the equity that gets Eroded. Yes Bank in FY2019 has a Equity of 27,000 Crores (116/Share),whereas it has given advances (loans) of 2.4 Lakh Crores & the Market Cap today is 26500 Crores.

These are the Top 3 Things That you need to know.

1) How Much is Stressed Book? – Well Ranveet Gill who seems decent  in the concall said that about 10,000 Crores is stressed asset in their book, assuming they write it off today (8000 Crores will be written off as they have already provided for 2000 Crores)+ Net NPA of 4500 Crores that they have not provided for, the Adjusted Book Value of Yes Bank would become 27000 Crores (Orginal Equity) – 8000 Crores- 4500 Crores = 14500 Crores of Adjusted Equity, At Adjusted Equity of 14500 Crores the Bank is still cheap at 1.82x Adjusted Price to Book. The Question is can we believe that there is no more stress except the 8000 Crores what Ranveet Gill said in the Concall, Well investors would remember what happened in Axis, SBI & ICICI from 2014 to 2016 where every quarter they would increase the WatchList slowly, We have absolutely no Idea whats there in the books, but we know out of the 2.4 Lakh Crores of Total Book it has 1.74 Lakh Crores is Corporate book. Remember i made a point that in 2014 the Total Corporate book of Yes bank was 55 thousand Crores, the good thing which has happened is that Yes Bank Grew its book 4x After 2014 & new NPA Created after that have been a lot lesser (Except ILFS, DHFL, ADAG & Essel ofcourse)

2) Franshisee Value = Lets say Even if 8000 Crores is written off, The pre Provision profit of Yes bank was 8100 Crores in FY2019, they can easily take this knock & move ahead, Axis had 16000 Crores of Pre Provision profits in Fy2016 & they easily took a 28000 Crore Provision & its still at New highs. Those who remember Buffett bought 40% of his portfolio in American express in 1963 when the company had lend to Allied Crude Vegetable Oil which was a massive fraud as it faked its Sandalwood Oil Inventory, Buffett knew that American express is a Great Franchisee & this is a One off event and he invested 40% of his partnership in American Express & made a fortune. Now i understand Axis & ICICI were great franshisee with 2.5 Crores Customers & 5 Crores Customers respectively but is Yes Bank as good?. Well Ranveet Gill in this concall revealed that only 30% of Yes bank’s 1100 Retail branches are Profitable but he targets that 80% of its branches would be profitable by 2023.

3) Capital Raise – I am sure that Capital Raise is not going to be a very big deal if they can come transparent & probably would be the turning point if any for this company. Axis Bank raised 1.6 Billion$ from Bain capital in 2017 & that gave confidence that NPA are disclosed & worse is behind. Yes Bank has taken board approval to raise 1.2 Billion$ & i am sure no large investor would give yes bank 25% of its today’s MarketCap without looking at its book. This would probably be the most important News to watchout for in Yes bank.

Conclusion – Stallion Asset has no position in Yes bank whatsoever, this blog was written for your better understanding of whats happening in Yes bank & not for buy or Sell recommendations. The bet on a Leveraged Entity is always a bet on the Banker not on these fancy P/B Ratio’s because nobody really understands whats inside those books. Rana Kapoor couldn’t convince the street that he has a clean book infact there were consistent divergence for not recognizing NPA’s in FY2016 & FY2017 but for its FY2018 Yes bank had got a clean chit from RBI.  If 8000 Crores is the only Provision left to be made & Ranveet gill is speaking the Truth then this is a bargain but of course the way to recovery is going to be a challenging ride.

Disclosure – Stallion Asset is a SEBI Registered Advisory Company & This is just for Education purpose. This is definitely not a recommendation of either buying or selling the stock.

Source: https://www.stallionasset.com/blog/yes-bank-say-yes-or-no/