Yes Bank Shares Fall 12% After Court Quashes AT1 Write-Off, Q3 Profit Falls

Shares of Yes Bank Ltd. dropped over 12% after the high court quashed the company's decision to write off its AT1 bonds. The surprise drop in the private lender's third-quarter profit further aggravated the situation.

On Friday, the Bombay High Court also quashed Yes Bank's March 2020 decision to write off Rs 8,415 crore worth AT1 bonds. The high court's order came in a petition filed by a clutch of retail bondholders who were aggrieved by this decision.

While the court did not question the merits of such a write-off, it said that the decision was taken a day after the government notified the Yes Bank reconstruction scheme on March 13, 2020.

Over the weekend, the company also reported 80% year-on-year drop in net profit in the December quarter to Rs 51.5 crore on higher provisions against older bad loans.

However, the lender's net interest income, or core income rose 12% from a year earlier to Rs 1,971 crore. Other income, too, rose to Rs 1,143 crore, up 56% year-on-year.

Shares of the company fell as much as 12.15% to Rs 17.35 apiece, the lowest in a month. The scrip closed 8.3% lower at Rs 18.15.

Of the 14 analysts tracking the company, one maintains 'buy', four suggest 'hold' and nine recommend 'sell', according to Bloomberg data. The 12-month consensus price target implies a downside of 6.5%.

Here's what brokerages made of Yes Bank's Q3 performance:

• Maintains 'hold' rating, raises target price to Rs 19.3 from Rs 15.7 earlier, implying a potential downside of 2.5%.

• Yes Bank’s earnings were weighed down by higher than anticipated provision related to ageing of stressed assets.

• Bank now carries net security receipts of Rs 37,700 crore and valuation/ageing provisions on the same, if not offset by recoveries and resolutions, may keep earnings volatile.

• We see a gradual turnaround in relevant operating metrics driven by granular retail assets as well as liabilities and improved confidence in stability of the franchise.

• Post the stressed pool sale, adjusted book value (adjusted for net NPAs) has been favourably impacted to the extent of 8-10% despite lower earnings build-up for FY23.

• Remain cognisant of the risks arising from the delay in resolution of stressed pool, incremental ageing-related provisions, modest RoE profile during transition, decision to write-down AT-1 bonds being challenged in Court and stock supply overhang post the expiry of lock-in shares in March 2023.

• Maintains 'sell' rating, raises fair value to Rs 17 from Rs 16 earlier, implying a potential downside of 15%.

• This was an important quarter for the bank as it probably marks the end of discussion pertaining to asset quality. We may have underestimated the challenges faced in the interim but the progress made is definitely nothing short of being called as spectacular.

• However, our focus shifts back to the core business operations and the ability to build an investment thesis for owning the bank. We are probably some time away. With high provisions on the back-book, it is quite possible that we are likely to see an extended period of recovery that can keep credit costs at negligible levels but that appears to be the only key mediumterm advantage for the bank.

• The bank needs to demonstrate a lot more and the probability of falling short of expectations is quite high.

• It is quite likely that we could see a prolonged period of weaker-than-expected return ratios even if the bank is able to successfully demonstrate a superior underwriting in the next cycle.

• Rating under review, as Nirmal Bang seek further understanding on provisioning implications of security receipts which may impact profitability is going forward.

• The management reiterated its guidance of near term CASA ratio of 35%, but in the current environment, the bank will focus on maintaining CASA ratio at the current level.