- Yes Bank’s net profit surged 55% YoY, yet the stock slipped 3% in early trade.
- Credit growth stalled at ~5% YoY, well below peer averages.
- Return on assets (ROA) is only 0.9% and return on equity (ROE) remains sub‑par.
- Valuation sits at 1.4x FY27 adjusted book value – a premium many analysts deem unjustified.
- Analyst consensus remains a "Sell" with a median target of ₹18, implying upside risk.
You just saw Yes Bank’s profit jump, but the hidden alarm bells are louder than ever.
While a 55% year‑on‑year increase in standalone net profit looks dazzling, the underlying dynamics tell a different story. The surge is largely a bookkeeping effect—a 91% plunge in provisions—rather than a robust expansion of earnings power. For a portfolio that relies on sustainable credit growth and healthy returns, the numbers raise more questions than confidence.
Why Yes Bank’s Profit Spike Doesn’t Translate to Sustainable Growth
The quarter’s headline figure was driven by a massive reduction in loan‑loss provisions. Provisions are reserves set aside to cover potential defaults; a sharp cut can boost earnings temporarily but may also signal that the bank is still wrestling with asset quality. In Yes Bank’s case, the 91% YoY decline in provisions lifted ROA to just 0.9%, a level that barely scratches the surface of profitability required for long‑term expansion.
Analysts argue that without a genuine acceleration in core loan growth—currently hovering around 5% YoY—the bank’s earnings base remains fragile. Retail stress, evident in higher non‑performing assets (NPAs) within the consumer segment, further erodes confidence.
Sector‑Wide Credit Growth Slump: How Peers Are Performing
When you compare Yes Bank’s 5% credit growth to peers, the gap widens. HDFC Bank and ICICI Bank posted double‑digit loan‑book expansions in the same quarter, buoyed by stronger corporate pipelines and better risk‑adjusted pricing. Even state‑run lenders like State Bank of India, though slower, are outpacing Yes Bank on both loan volume and asset quality metrics.
This divergence matters because investors often benchmark private banks against the sector’s average return on assets (ROA) and return on equity (ROE). Yes Bank’s ROA of 0.9% lags behind the industry average of roughly 1.5%, while its ROE trails the 12%‑14% range typical of its larger competitors.
Valuation Pressure: The 1.4× Adjusted Book Value Conundrum
Valuation is a double‑edged sword. Yes Bank trades at about 1.4 times its FY27 estimated adjusted book value—a metric that strips out one‑off items to gauge the “real” net asset worth. For a bank with muted growth prospects, paying a premium over book value is risky. Historical precedent in Indian banking shows that when valuation multiples exceed 1.2× for a low‑growth lender, the stock often underperforms the broader Nifty 50 index.
In the 2018‑2020 period, several mid‑cap banks with similar pricing saw share price corrections of 15%‑25% as earnings failed to meet lofty expectations. The pattern suggests that the market is already pricing in optimism that may be hard to sustain.
Potential Catalysts and Risks: Supreme Court AT‑1 Bond Case
Beyond fundamentals, an external legal cloud looms. The Supreme Court’s pending decision on Yes Bank’s AT‑1 (Additional Tier‑1) bonds—contingent convertible instruments that absorb losses—remains an overhang. A negative ruling could trigger a capital squeeze, forcing the bank to raise fresh equity at a discount, further diluting existing shareholders.
Conversely, a favorable outcome could clear the path for a capital infusion, but the upside is limited compared to the downside risk of a adverse verdict.
Historical Context: The 2020 Reconstruction Lesson
Yes Bank’s 2020 restructuring, after a government‑led bailout, offers a cautionary tale. Post‑reconstruction, the bank posted improved asset quality, yet loan growth remained tepid for several years. Shareholders who bought on the post‑bailout rally saw modest returns, while those who waited for a clear earnings breakout faced prolonged stagnation.
The current scenario mirrors that past cycle: balance‑sheet clean‑up is evident, but the earnings momentum is still tied to accounting adjustments rather than organic growth.
Investor Playbook: Bull vs. Bear Cases
Bull Case: If Yes Bank can accelerate credit growth above 8% YoY, improve ROE to the mid‑teens, and secure a positive Supreme Court ruling, the stock could re‑price toward a 1.2× book value multiple, offering upside potential of 20%‑30% from current levels.
Bear Case: Continued retail stress, stagnant loan growth, and a possible adverse court decision could push earnings down, forcing the stock to trade below its book value (≈0.9×) and delivering a downside of 15%‑25%.
For the prudent investor, the key is to watch two leading indicators over the next two quarters: (1) quarterly credit‑growth numbers breaking the 6%‑7% threshold, and (2) any definitive update from the Supreme Court on the AT‑1 bond issue. Until then, the risk‑reward balance remains tilted toward caution.