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YES Bank Q3 Results: Recurrent Earnings Power at One-Third Pre-Provision Income

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Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">YES Bank's (YesIn)</a> solvency is set to be tested again by large, and growing Covid-19 related delinquencies. Credit quality looks set to crater unless restructuring efforts are significantly expanded.Loans overdue between 30-to-90 days more than quadrupled between Sept and Dec. following the lifting of the loan repayment moratorium by the Reserve Bank of India in August. Perhaps this was to be expected; however, given this large Covid-19 related delinquency trend, overdue loan growth at a fraction of this rate going forward could seriously compromise the institution.Given that YES Bank has already pierced the point-of-non-viability once in the last 12 months, the question for credit investors is the sufficiency of capital and earnings available to absorb additional losses. To assess this, we stress YES Bank’s solvency buffer via several Covid-19 coverage scenarios. This simulation delivers surprising, yet very preliminary results. To undertake this exercise, we answer three questions:<ol>
<li>How much of YesIn’s credit portfolio is at risk from Coronavirus contagion?</li>
<li>What is a sufficient coverage level for YesIn’s Covid-19 related delinquencies over time?</li>
<li>What is the sufficiency of YES Bank’s real recurrent earnings power?</li>
</ol>Please see our companion report, <a href="https://www.smartkarma.com/insights/yes-bank-q3-results-recurrent-earnings-power-at-one-third-pre-provision-income" target="_blank" data-smartkarma-citation="insights:47484" rel="noopener">YES Bank Q3 Results: Recurrent Earnings Power at One-Third Pre-Provision Income</a>, for how we derive the bank’s real recurrent earnings power.Despite the recent sell-off which offers greater credit spread opportunity, we remain comfortable with our Underweight recommendation on YES Bank’s 3.75% 2023 Senior Unsecured bond. The bond is now two price points lower than when we recommended an Underweight position. Since we are yet to see the depth of distress within YES Bank’s rapidly expanded overdue loan category, now is not the time to overweight YES Bank risk.

YES Bank's (YesIn) solvency is set to be tested again by large, and growing Covid-19 related delinquencies. Credit quality looks set to crater unless restructuring efforts are significantly expanded.Loans overdue between 30-to-90 days more than quadrupled between Sept and Dec. following the lifting of the loan repayment moratorium by the Reserve Bank of India in August. Perhaps this was to be expected; however, given this large Covid-19 related delinquency trend, overdue loan growth at a fraction of this rate going forward could seriously compromise the institution.Given that YES Bank has already pierced the point-of-non-viability once in the last 12 months, the question for credit investors is the sufficiency of capital and earnings available to absorb additional losses. To assess this, we stress YES Bank’s solvency buffer via several Covid-19 coverage scenarios. This simulation delivers surprising, yet very preliminary results. To undertake this exercise, we answer three questions:
How much of YesIn’s credit portfolio is at risk from Coronavirus contagion?
What is a sufficient coverage level for YesIn’s Covid-19 related delinquencies over time?
What is the sufficiency of YES Bank’s real recurrent earnings power?
Please see our companion report, YES Bank Q3 Results: Recurrent Earnings Power at One-Third Pre-Provision Income, for how we derive the bank’s real recurrent earnings power.Despite the recent sell-off which offers greater credit spread opportunity, we remain comfortable with our Underweight recommendation on YES Bank’s 3.75% 2023 Senior Unsecured bond. The bond is now two price points lower than when we recommended an Underweight position. Since we are yet to see the depth of distress within YES Bank’s rapidly expanded overdue loan category, now is not the time to overweight YES Bank risk.

YES Bank Solvency Simulation with Covid-19 Coverage Scenarios