Sell YES Bank: Kotak Recommends, Shares Fair Value Analysis

YES Bank Ltd shares rallied nearly 9 per cent in Monday's trade post March quarter results, Kotak Institutional Equities asked investors to sell the stock as risk-reward remains unfavourable. The current YES Bank stock price factors in most of the positive outcomes while the delivery of better return ratios and steady growth that is similar to other frontline banks are still a few years away, the domestic brokerage said.

YES Bank shares jumped 8.98 per cent to hit a high of Rs 28.50 on BSE. Kotak said the stock would need a far lower valuation multiple to change its view.  "There is unauthenticated media reports on change in shareholding structure but we don’t see this to have a bearing on the financials in the near term," Kotak said.

Kotak has an unchanged fair value of Rs 19 on YES Bank, as it values the bank at 1.2 times book and 13 times estimated FY2026 EPS for return on equity that is still below 10 per cent.

YES Bank’s said its earnings doubled led by lower provisions, but there were several one-offs relating to IT refund, write-back in security receipts and gains in sale of loans to ARC, which were offset by higher provisions, Kotak said. 

"Slippages were at 2.5 per cent driven by retail/SME portfolios. The recovery progress is slow but not an unexpected outcome," it said.

Kotak said YES Bank ended FY2024 on a mixed bag. Asset quality showed improvement as seen with headline NPL ratios and most of the stress currently in the early buckets (30-90 DPD), which is a business-as-usual outcome. 

The bank has pulled back a bit on disbursements, especially unsecured loans, but the portfolio is not showing any differential worrying signs, Kotak said.

"The weak liability franchise played through on NIMs, which declined in FY2024 as costs of funds rose sharply. Capital adequacy levels may not be similar to the other private banks but these ratios are currently comfortable for medium-term growth. The bank has given us insights on the drivers of RoA improvement (improve loan mix, reduce PSL shortfall, improvement in liability profile or improve loan sourcing mix)," it said. 

Kotak said such changes take time and investors need to be fairly patient while the bank executes them. YES Bank only has a tailwind in lower credit costs as the balance sheet looks comfortable to keep it closer at these levels, Kotak said.