- Profit surged to INR 9.5 bn, outpacing expectations despite modest loan growth.
- Net interest margin (NIM) rose 12 bps QoQ to 2.6% while risk‑weighted assets fell below 7%.
- Retail slippages eased to 3.4% but remain higher than peer averages.
- Valuation stretched to a 1.2× FY28E P/E, implying a target of INR 24 per share.
- Key catalysts: legacy NPA recoveries, RBI’s green light for SMBC’s Indian subsidiary, and a potential CASA boost.
You missed the fine print on Yes Bank’s Q3 earnings, and that could cost you.
Why Yes Bank’s NIM Rise Is Both Good News and a Warning Sign
Net interest margin, the core profitability engine for any bank, climbed 12 basis points to 2.6% in the quarter. The uptick came primarily from a shrinking proportion of risk‑weighted assets (RIDF) – now under 7% of the balance sheet – which reduces the capital charge and lifts earnings per rupee of risk. However, a lower RIDF also hints at a retreat from higher‑yielding, riskier loan book segments. In plain terms, the bank is earning more on safer assets, but may be missing out on higher‑margin opportunities that competitors like HDFC Bank or Kotak Mahindra are actively pursuing.
How the Results Stack Up Against Peer Banks
When you compare Yes Bank’s 5% YoY loan growth with the sector average of roughly 8‑9%, the gap is stark. HDFC Bank posted 12% loan growth, buoyed by aggressive retail advances, while SBI’s loan book expanded 7% on the back of government‑linked financing. The divergence reflects Yes Bank’s cautious underwriting after its 2020‑21 stress episode. Yet the bank’s CASA (Current Account Savings Account) ratio continues to outpace peers, delivering a cheaper funding base that cushions NIM pressure. If Yes can convert this CASA advantage into sustained loan growth, it could narrow the performance gap.
Historical Parallel: The 2021 Turnaround Playbook
Back in FY22, Yes Bank posted a similar profit surprise after a steep rise in its NIM, driven by an aggressive deleveraging of risky assets. The market rewarded the bank with a 30% share price rally, only to see the rally stall when loan growth lagged. The lesson? A one‑off NIM boost can spark short‑term optimism, but lasting upside hinges on the quality and scale of new credit. Investors who ignored the underlying loan‑growth weakness in 2021 saw their gains evaporate.
Sector‑Level Implications: What This Means for Indian Banking
The Indian banking sector is at a crossroads between tightening credit standards and the need to fund a still‑vibrant consumption‑driven economy. Yes Bank’s modest loan expansion signals a broader prudential shift, especially after the RBI’s recent emphasis on asset‑quality metrics. At the same time, the RBI’s provisional approval for Sumitomo Mitsui Banking Corporation (SMBC) to set up a wholly‑owned subsidiary in India opens the door for more foreign capital, potentially compressing funding costs across the industry. If foreign banks capture market share, banks with strong CASA balances—like Yes—could retain a competitive edge.
Key Drivers Behind the Q3 Numbers
Three headline items powered the surprise profit:
- Negligible credit cost: Slippage on retail exposures fell to 3.4%, a modest improvement but still above the sector median of ~2%.
- One‑off gains: A tax refund of INR 450 mn and a labour‑code provision of INR 1.55 bn offset each other, leaving the bottom line largely pure operating profit.
- SR redemption tailwinds: Bulk senior‑rate (SR) bond redemptions reduced interest‑expense drag, further polishing NIM.
Investor Playbook: Bull vs. Bear Scenarios
Bull Case
- Accelerated recovery of legacy non‑performing assets (NPAs) lifts net interest income.
- Rising CASA share improves funding cost, allowing the bank to tighten spreads without hurting profitability.
- SMBC’s entry brings strategic partnerships, foreign capital inflow, and potential co‑lending opportunities.
- Valuation re‑ratings to a 1.5× FY28E P/E, pushing the target price toward INR 30.
Bear Case
- Retail slippages rebound above 4%, eroding net interest margin.
- Loan growth stalls below 3% YoY, leading to a stagnant asset base and pressure on earnings.
- Regulatory crackdown on risk‑weighted asset ratios forces higher capital provisioning, compressing ROA.
- Target price drops to INR 18 as the market applies a discount for heightened credit risk.
Bottom line: Yes Bank’s Q3 earnings have cleared the low‑ball expectations set by the market, but the path forward is riddled with both upside catalysts and downside pitfalls. Your next move should depend on how you weigh the likelihood of a robust NPA cleanup against the risk of lingering retail delinquencies.