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The Spectacular fall of Yes Bank-What should investors do now?

Yes Banks shares have fallen nearly 85% from the peak

With such a scary fall in the share price most retail investors have been catching this falling knife!


What to do now?Let us analyse! Poor Asset Quality:-


The Bad loans or NPAs showed a significant rise as the new management tookover and cleaned up the books


The management has guided another 10,000 crore of assets under watchlist which could potentially turn NPAs.


However as seen below from the list the toxic assets could be much higher.



The list of stressed asset seems to be 3x of the managements guided band!


Some of these companies are really stresses and could slip into NPAs


Severe Capital Problems:-


The spectacular rise of NPAs have have sharply eroded the capital of the bank

The Tier 1 ratio remained low and in case of any further spike of NPAs could further erode the ability to lend.


Yes Bank just concluded a QIP of 1930cr to various investors at Rs 83.55/share.

The bank’s core Tier I capital ratio will improve to 8.55-8.60% from 8% reported in June 2019, giving the bank some headroom over the mandatory 8% Tier I it has to maintain by March 2020.

According to media reports the bank further plans to raise Rs 9000 crore from PE investors.The fresh dilution in equity should be well below the book value.


Until the bank raises further capital any fresh loan growth would remain muted.


Lack of a clear direction by the new management:-


While the new management have taken the initiative to clean the toxic loans of Yes Bank,there is no clear plan as to how the underwriting standards will change in the future which could prevent future NPAs


The new management has expressed desire to increase the retail book to 40-50%,however there is increased stressed in retail too and just by increasing retail loan there is no guarantee the NPAs would go down!


Valuation:-


At CMP of Rs 60,the stock trades at "trailing P/B" 0.75x.


Having said that the biggest question is.....

Is the reported book value a true reflection of the actual book value?


While the watchlist remains at 10,000 cr,the stressed asset exposure seems to be far higher and any slippage of these assets to NPAs could erode the book value further.


So What Should Retail Investors do?


A big turnaround or a complete makeover of the bank will take atleast 3-5 years!


99% of the investors who are risk averse must stay away from Yes Bank.


Many risk seeking investors do find value at the current price,however for most retail investors there are so many quality banks available so why venture to such controversial names?


Disclaimer:-The author of this report is a Chartered Financial Analyst(CFA) from CFA Institute,USA,the views expressed in the above report are personal and at no point should be construed as an investment advise.Please consult your financial advisor before making any decisions.Reproduction of the above report is strictly prohibited.


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