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Yes Bank Ltd
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Ladies and gentlemen, good day. And welcome to YES Bank Limited Q2 FY '23 Earnings Conference Call. From the management team, we have with us Mr. Prashant Kumar, MD and CEO; Mr. Niranjan Banodkar, Chief Financial Officer; Mr. Rajan Pental, Global Head of Retail Banking; Ms. Anita Pai, Chief Operating Officer; Mr. Ravi Thota, Country Head, Large Corporates; and Mr. Akash Suri, Country Head, Stress Assets Management.
[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prashant Kumar. Thank you, and over to you, sir.
Thank you for joining YES Bank quarter 2 financial results call. At the outset, I would like to wish you and your families a very happy Diwali and a prosperous new year. With me, I have the top management team of YES Bank. I also realized that today is an earning heavy day for the banks and in the interest of time, I will be only highlighting the key points for the quarter.
As you are aware, the bank has signed an investment agreement with 2 market private equity investors, Carlyle and Advent to invest INR 8,900 crores. We are awaiting regulatory approval and expect to receive the capital infusion in the quarter 3. The bank has chosen JC Flowers, the global distressed debt fund to acquire an identified pool of INR 48,000 crores of its stressed asset pool at a bid of INR 11,183 crores, which is 135% of the carrying value on the balance sheet. Pursuant to expected closer in quarter 3 this year, this is said to be the largest sale of it's stressed assets in the domestic market.
There have been multiple credit rating upgrades by CRISIL, ICRA, India Ratings and CARE. Now the bank has the highest short-term rating at A1 plus and long-term rating has improved to A- with a positive outlook. Now specifically coming to quarter 2 financial results. Bank has reported an operating profit of INR 790 crores, which is 34% increase quarter-on-quarter and 17% increase in Y-o-Y basis on the back of NIM expansion of 20 basis points quarter-on-quarter and 40 basis points Y-o-Y and improving cost-to-income ratio to 72.8%.
Our cost to assets have been stable at 2.6%, in spite of inflationary pressures and higher technology spend. Our bank has reported a net profit of INR 153 crores, which has been largely. [Technical Difficulty]
Ladies and gentlemen, thank you for your patience. We have the line for the management reconnected. Sir, you may.
Okay, sure. So I think I would just like to repeat briefly to what we have spoken about the financial results. The bank has reported an operating profit of INR 790 crores, which is 34% increase quarter-on-quarter and 17% increase on Y-o-Y basis. on the back of NIM expansion of 20 basis points quarter-on-quarter and 40 basis points Y-o-Y and improving cost-to-income ratio to 72.8%. Our cost to assets have been stable at 2.6% in spite of inflationary pressures and higher technology spend.
Bank has reported a net profit of INR 153 crores, largely impacted due to ageing related provisioning requirement during quarter 2. The bank's pre-provisioning operating profit to asset is on track. However, any potential delay in expected recoveries may lower the expected FY '23 ROE. Advances have grown by 11% Y-o-Y of which retail has grown by 43%, SME 19%, mid-corporate 34 and the corporate, there has been a degrowth of 18%.
The bank expects the advances growth to feed deposit growth. The mix between retail and SME, mid-corporate and corporate has further improved to 54% retail and SME, 12% mid-corporate and 34% corporate. Retail advances are seeing good traction across home loans, vehicle loans, personal loans and the bank is also looking to strengthen its gold loan and education loan portfolios. New sanction disbursement aggregated to INR 24,149 crores during the quarter across the segments.
And despite decline in net advances on the large corporate our new business generation continues to be strong with corporate disbursement of more than INR 3,700 crores. The large repayments in the corporate segment continued in the telecom and infrastructure space with disbursement to better-rated corporates.
On the deposit front, our CASA ratio continues to improve with potential near-term headwinds to target of 35%. In spite of these challenges, our deposit is more than INR 2 lakh crores, which is 13% growth on Y-o-Y and 4% quarter-on-quarter. On the back of a 19% Y-o-Y growth in CASA deposit, which is also 4% growth on quarter-on-quarter basis.
The bank's focus is on granularizing the liabilities with CASA and retail deposit. Retail term deposit now at 62%. Average daily current account balances have grown by 37% Y-o-Y and average daily saving account balances have grown by 29.4% Y-o-Y. On the asset quality front, GNPA ratio has improved to 12.9% against 13.4% last quarter. And net NPA ratio has also improved to 3.6% against 4.2% last quarter.
The Slippages, which is INR 896 crores, continue to be lower quarter-on-quarter and Y-o-Y. Slippage out of the standard restructured pool, they are at INR 303 crores, which primarily consists of one large exposure. 60% of our standard restructured advances are out of [ Marituba, ] Reduction in overdue loans within 31 to 90 days -- bucket -- is down by INR 3,000 crores.
Resolution momentum continues to be strong with total recoveries and upgrades of INR 1,586 crores. The provision coverage ratio has improved to 84%, and the provision coverage ratio of the security receipt also stands at 85%. Bank CET ratio stand at 11.7% and total capital adequacy at 17.5%. The risk-weighted asset to total asset is improving and is currently at 71.2%. We have also added 434 employees during the quarter.
All the above points demonstrate a strong momentum in the buildup of a good quality franchise. With this, I want to thank you all once again for taking the time out for joining this call and wish all of you and your families good health, prosperity and happy Diwali. We can now open the floor for your questions.
[Operator Instructions] The first question is from the line of M.B. Mahesh from Kotak Securities.
A couple of questions. Just to clarify, what is now the time lines for the JC flower [indiscernible] seem to get completed on what aspects are there as well for the Carlyle and Advent [indiscernible] one more steps are needed now?
In case of JC flower, I think the time line would be somewhere around the third week of November. And in case of equity rates, now the only RBI approval is awaited.
And JC Flowers, since when the transfer happens on JC Flowers, where do you see after that the gross and net NPA to come in, given the current book that you have?
Yes. Our gross NPA would be around 2%, okay? And net NPA would be around 1%.
And there will be no provisions that was needed at the time of transfer?
That's right.
Okay. If you just kind of assume that based on this current progress of where the resolutions are happening, what is your expectations of credit costs for next year?
Credit cost for the next year, you are saying?
Next year, yes. Because there's a combination between ageing related NPLs as well as Resolutions that could potentially happen of that group. Where do you see credit costs heading for next year?
So my credit cost will be a function of also some of the recoveries that we will come through -- at the net level we've had a provision -- nontax provisions to assets at about 40 to 50 basis points. I think we will possibly see it remain in the 50 to 60 basis point range.
Okay. So is it fair to assume that now that you have addressed the asset and capital issues, now it is just a question of some -- of your ability to improve the margins. That's the only variable which is [indiscernible].
So ability to?
Improve margins. Actually, last final hurdle that is now left.
So I would not be saying the hurdle. I would be saying this is the direction in which we are moving, okay? And after taking care of all other issues, I think we are on the right track.
Thank you. Next question is from the line of Mahrukh Adajania from Nuvama.
Sir congratulations. Sir, there was some disturbance in my line, so sorry. Could you share the credit cost guidance for next year or this year after the transfer, sorry, if all things go well and as for the recovery has for your assumption. I missed that. That's what I'm asking again. Apology.
No, Mahrukh, we're not giving any guidance. We are -- because clearly, there are moving parts. What we indicated is that 40 to 50 basis points is what was the provision credit cost that we have, nontax provisions to assets as a ratio that's prevailing right now.
Our expectation is that we should broadly be in the same range, maybe 50 to 60 basis points next year, that's our expectation. But please don't take that as a guidance because that's something we will also look at the start of next financial year.
Got it. Got it. And -- so now some questions on operations. Since you've also seen a 20 basis points QoQ margin expansion, congratulations for that first, but how sustainable are these margins, say, not only the next half or over the next 4 to 5 quarters? Because that immediate outlook is essential for anyone to take a bigger call on the sector, not only on your [indiscernible] of other sectors or that.
And in general, how do you think is the sector loan growth and your loan growth sustainable because it is defined global trends? So how long will we be defiance, is my next question?
So Marukh, on the loan growth, I think what we are seeing the industry loan growth around 18%, right? And you are rightly saying like this has defined the global environment. And we also believe that if the financial institution started pricing the risk properly.
And I think the estimate objective also in terms of the monetary policy is also to have a control on the loan growth. I think then only the objectives will be achieved. So I think over a period of time, I think we would see this loan growth coming down. But at least as a [indiscernible] believe that this is a time where instead of running after the top line growth as we need to optimize the balance sheet, and we see that we do the transaction at the right levels, okay?
So I think for us, loan growth has been 11%, but we are expecting that we would be in a position to be around 15% loan growth by the year-end. But at the same time, there are 2 things. We are not going to compromise on the quality. And we would not do the transactions at a rate which does not make a commercial sense to.
Got it, sir. Sir, the other -- so sir, in terms of your own margins, any outlook?
So currently, we are at 2.6%. And I think the way I have tried to articulate in terms of our strategy, I would not be seeing like margins would continue to improve 20 basis points every quarter. in the current situation because of these issues in terms of rising interest rate scenario.
But I think in terms of good control on the slippage of the loans, okay, and also in terms of taking a conscious call of doing the transaction at the right pricing, we would be definitely seeing an improvement on the NIM expansion going further, but not to that extent, which as we have seen in the current quarter.
Got it sir. Sir, but just in terms of deposit competition, sorry, just in terms of deposit competition likely to get more aggressive in the second half, how will deposit mobilization pan out? Because already the larger banks have not yet increased rates in some smaller banks have.
So if larger banks start increasing rates rapidly, how does deposit competition pan out and then that impacts everyone's growth, right?
No, I completely agree with you partially that deposit growth is something which everybody is aspiring, but I think what we have seen that even the larger banks have increased the rates significantly, okay?
But definitely, since all the banks are increasing rates and there is a tightness in the liquidity, this would continue to be a struggle. But I think what we have seen that there has been a Y-o-Y growth of 11% on the deposit side, and we have been able to reduce our cost of deposit by 10 basis points. So I think we are quite confident that with the kind of customer connect, the customer service and the products which we offer in the market, I think we would be continue to increase our deposits with the control on the cost. But yes, this would be in a very, very challenging environment.
[Operator Instructions] The next question is from the line of Saurabh from JPMorgan Chase.
A few questions. First is on Slide 6 says a delay in resolution. Could you just give some color on what you're seeing? Is this around the [indiscernible] account? Second is on your deposits, as you've seen a 14% quarter-on-quarter current account growth and a 2% degrowth in savings.
So if you can talk about that as well. And the third question, sir, is on NIMs. So fair to say that your incremental margin, which is being generated at the [indiscernible] should be mostly closer to 3%, 3.2%, 3.5% mark? What is the 2.6% [indiscernible]
So I think to your first question in terms of delay in the recovery, because there is always a timing issue, okay? Some of the recoveries, if we are expecting within the current financial year, that is a spilled over to the next, the first quarter or second quarter of next financial year. So we were talking about that kind of thing.
And if those expected recoveries happen as per our estimate in the current financial year, then there is no issue, but there are always uncertainties around this. The second part.
One large account or just a few accounts? So this is only one large...
Mainly one large account. But I think it's a moving part because there have been a number of levels at which the resolutions and the recoveries happen. And sometimes there have been delays in terms of the legal decisions, legal issues and also in terms of actually money hitting into [indiscernible].
But we were only talking about this -- but if all the recovery -- expected recoveries happens as per our expectations, then there is no issue. But definitely, this is one of the area where you can't be 100% sure, okay? That's why you were talking about that part. The second question in terms of the NIMs.
So I think NIMs, we will continue to work in terms of expanding the nets, but reaching to 3.2% or 3.5%, still I think, some time early. And in the current situation, where because of the rising interest rate scenario, I think we are continue changing, but we would be improving our NIM quarter-on-quarter.
No, sir, I was asking the incremental business that you are generating at the bank, what is the incremental margin on the business that you generated?
So Saurabh, if you look at actually our net interest margins today and because I think this will require a little bit of a context. So there is, let's say, the drag that we get from the NPA. If you actually adjust for that, so I'm just giving you a number where if you look at yield on advances of about 8.5%, you adjust for the NPAs. The -- actually the standard advances book is already operating at about 9.5%, right?
So the loan spread that we are actually running on the stock of the performing book and what we are also doing incrementally is actually quite commensurate. So we've not seen not a significant differential. What we are seeing is that our drag of NPA is coming down. In the recent times, we have also seen deposit rates also pick up a little bit in the recent time.
So incrementally, I am matching the loan spread on the stock of book. Let's say, the run rate for the last 9 to 12 months actually was we were expanding that, which is broadly compressed at this point in time. But our endeavor is that we will want that to continue to expand as we go along tiding over this current, I would say, tight liquidity situation.
Okay. So fair to say that once the capital raise comes between the capital raise and then the rate you get, at least on the borrowing side, that will be the bigger driver at least in [indiscernible].
Sorry, sorry, I missed the last question. Do you think after the capital raise?
Any upgrade that you get on the borrowing, any reduction that it is [indiscernible] reduction at your borrowing costs or the driver of that increment fact?
No. So it is going to be a function of continuing to improve also the mix of your deposits. So for example, for the last, let's say, 2 quarters, we are at about 30% to 31% of CASA ratio. I think this is -- there is no magic pill here. I think it's a very execution focus worth of getting the 31% improved to 40% plus, number one.
And number 2 is that at the end of the day, how do we see the loan spreads actually expanding, as I mentioned earlier, that our loan spreads were actually expanding. It's only briefly given the way the rates have reacted immediately. We've kind of seen some amount of, I would say, slight contraction in the loan spend, but we expect that should start expanding again because we will want to keep expanding the loan spreads as we go along from here on.
The only point I made is that right now, we are going through a little bit of an aberration in the external environment because of some amount of liquidity tightness and the way the rates have actually moved up in a very short period of time.
Okay. And lastly, just on this 14% quarter-on-quarter current account, what will expand that?
No, I think current account is one [indiscernible] there, I think we are continuously working, and we will be seeing either a similar or better growth on the current account balances.
Because if you have seen even our average current account balances are doing very well and the kind of the customers in terms of the solutions which we provide, I think we would continue to get better current account balances.
So this is not a period. I mean there's no one-off in this current account.
No, no one off. I think this is a very, very sustained, I think, the momentum for us, which would continue to improve.
In fact, if you also look at, let's say, the average balances sort of, and we're talking about actually daily average balances, even those have grown by 38% on a year-on-year basis.
Next question is from the line of Hardik Shah from Goldman Sachs.
This is Rahul here. A couple of questions. First is, is it possible to move the retail deposit mix within the term deposits that we have in case I've missed out?
So within the term deposits, the less than INR 2 crores book that we have is about 31% around.
Understood. Got it. That's helpful. And the borrowing cost that we have on an incremental basis due to the ratings upgrade, have you seen any potential benefit playing out? And even on the stock of borrowings, et cetera, or the wholesale deposits, if the benefit already hasn't played out and by when do we expect that benefit to start paying out?
So Rahul, see, I mean, in terms of the borrowing, I think we have to look at the progress and the improvement that we've seen in the ratings and also a very significant, I would say, liquidity tightening and increase in interest rates.
I think the pace at which the -- I would say, the external environment has actually [indiscernible] has been very fast, right? So I mean there is a very difficult one-on-one correlation to establish in terms of how can I demonstrate an increase in the spread. What we can definitely see is that, that our deposit growth ability to access deposits continues to improve.
What we are trying to focus on is relative to deposit -- the deposit rates relative to competition, I think we are quite confident about that. Yes, liquidity has tightened, but I think we will continue to work on that. Our access, let's say, to long-term lines, let's say, for refinancing, for example, I think has continues to be quite strong.
In fact, let's say, in September quarter, we've looked at refinancing borrowings in the range of about INR 3,500 crores. And we are talking about 3, 4-year money as well where we've actually raised. So I -- what I can definitely say is there is no constraint that we've seen.
We continue to see improving pricing relative to what we were about 6 to 12 months back. But I think we've also have to just suppose the recent, I would say, increase in rates and the liquidity tightening position.
Got it. Got it.
So they will normally -- normally, the advantage of the rating upgrade in the pricing always happens when there is a normal situation on the liquidity or when the situation would move towards the normal liquidity. I think in the current time, it is more about the access to liquidity rather than the pricing.
Understood. That's helpful. Just 2 small questions. One is the tax rate currently stays at about 25-odd percent. Do we expect to get benefits from the depot tax assets at some stage, which will potentially bring down the tax rate?
So Rahul, the way the accounting will happen is that we will continue to report tax at 25%. The benefit that you will see is that as and when we have profits, those will start accreting directly into my network rather than getting adjusted CET1 because the DTA will start getting released.
I think that -- so we are not going to see in our reported earnings. Reported earnings will continue to have a provision for tax at 25%. But the accretion to our CET1 will actually be more than what we see at a pat level.
That's. Okay. Understood.
In a simplistic way, I'm sorry, I'm -- in a simplistic way, if we are looking at, let's say, a PAT of 100, what I'm accreting effectively to let's say, to the [indiscernible] is going to be 110%. It's actually going to be 110%, not 100%.
Understood. That's already happening as we speak.
That's already happening as we speak. That's correct.
Understood. The last question is just a view on the savings rate because I think a large publishings of the bank or actually both SBA and General Bank have raised the rates on sales deposit in certain buckets of deposits, ticket prices. Any thoughts that you all have about what your bank [indiscernible] ?
No, I mean this is the evolving situation, okay? Where like the large public sector banks have started increasing the rates. I think in very, very recently, okay? It also shows very, very tight liquidity position into the market.
But I think the is the function in terms of getting the liquidity is not always in terms of pricing. It is always also in terms of the customer connect and the customer service, okay? But yes, there are absolutely headwinds in terms of getting the liquidity at the right price. But at the same time, we also need to appreciate that this is something which is very, very critical for the rating industry for any bank, okay?
Everybody will try, and we are also moving in the right direction. But I think the whole issue would be in terms of the right mix between the current safety and term deposit. So if you are able to provide the solutions to your customers, then I think getting a good mix from the current account side. That solution is there.
Next question is from the line of Jai Mundhra from B&K Securities.
Sir, first, on your JC Flowers deal.
Jai sorry to interrupt you. Your audio is not very clear. May I request for your speaker to be louder, please?
Yes. Is this any better?
No, it's got a little worst.
Is this any better?
Yes.
So sir, regarding the JC Flower deal, wherein you also intend to acquire up to 20% equity stake there. What could be the quantum? And what could be the implication on your CET1?
I think that 20% would translate into something around just INR 300 crores to INR 350 crores because it also depends on actual when the portfolio will be transferred. It would be net of the recovery will [indiscernible] subsequent to 31st March. So I think the capital which would be required from our side when we'll go for 19.99%, would be somewhere between INR 300 crores to INR 350 crores, which is not having any significant or minimal impact on our capital. That's 13, 14 basis points.
Right. No, no. So that is insignificant. The second question is on your guidance tracker. So you have said that PPOP to assets is mostly on track. That number, if we calculate is around 90 to 95 basis points or less than 100 basis points of asset. So just wanted to check what is the outlook on debt metrics, PPOP to assets?
So PPOP to assets, our expectation is that we should see at least about a 10 to 15 basis points or more expansion. As we kind of go along. If I actually look at, let's say, the DuPont for the bank, excluding, let's say, the NPA position or portfolio, the broader structure is we have about a 1.2% operating profits on the ex NPA book.
And actually, a provision cost is about, let's say, 15 basis points on those assets actually are running about 85 basis points of, let's say, ROA actually on the good bank. Of course, there is a drag that's coming from, let's say, the legacy book. So the point is on the NIM expansion, when you look at sheesh to assets, operating costs like we have been guiding, I think we believe we have capped out at 2.6% assets.
I think about 1% to 1.1% at the full bank level is where we will basically be for this particular year -- financial year.
No. So even for your medium-term target, when you intend to reach ROE of 1% to 1.5%, how should the look PPOP like? So that is the question. And I think -- so yes, so that is...
So Jay, no, sorry. If you look at our long-term target, the net interest margin of 2.6% clearly, our expectation is that we should move into a NIM trajectory of 3.25% to 3.5% from a medium-term standpoint. When we look at sheesh to assets, which is ballpark at about 1%, our expectation is that we should move to about 1.2% to 1.3% sheesh to assets.
That kind of takes us to revenues to assets of about anywhere between 4.5% to 4.75%. If I take cost to assets, let's say, because there's some efficiency will also start building it after having capped cost assets at 2.6%, so cost to assets at 2.5%, essentially takes our PPOP to assets at about 2%. So I think that's really what our expectation is in terms of building out.
But this is not a very near-term thought process. I think it's a very execution focus quarter-on-quarter where we like to keep improving on our margins, keep improving on our cross-selling fees and continue to keep improving our cost of acquisition and running the business to ensure that we are efficient on cost to assets. So I think that's the combination that we play out on our PPOP to assets.
Right. Right. Sure. And just lastly, if you can disclose the sector of the exposure that you said that which has slipped out of restructuring book and this is a bit chunky that would be it, Sir.
So there was only one account on the real estate side, okay?
Okay.
The next question is from the line of Srinivas, Individual Investor.
Yes. My question is, in the last one year, YES bank has gone on a branch expansion spree. So now the rising interest rate environment, is it -- I mean giving you the advertise level of growth in business or those branches are not able to generate the required operations or profits. Is that the reason for increase in the OpEx?
So as regards to our expansion plan, we have opened close to 25 branches in this year. The opening of the branch, the selection of the location and the placing of the branch is strategically done to see that it is in the vicinity of a high deposit center as well as the credit center.
From that extent, all of these branches are actually doing reasonably well and as per the plan. And we are actually able to see a good traction on the overall deposit and the customer base getting created in and around these branches.
[Indiscernible] there was a question on OpEx.
Okay. But on the advanced side, like are the branches contributing?
So as I said, most of these branches, we are not only going with the deposit center. We are also evaluating a good credit market in and around that market. And hence, on day one, these branches are operational on both deposits as well as on the asset generation from as far SME as well as on date.
And the size of these branches, typically are actually not very large branches, but in high potential areas, which can give us enough and more customers.
So my second question is actually, there is significant increase in the provisioning in this quarter. So is this because of slippages like, I mean, if slippages are reduced, then is it entirely because of the ageing elected provisioning? What is the mix between ageing-related provisioning and the slippage-related provisioning in this quarter?
So just 2 accounts, so have contributed to about INR 740 crores of ageing-related provisioning. Of course, there are more, but I just at the headline level, INR 740. I we look at our -- if you look at our net provisioning that we've had, that's about INR 570 crores. So clearly, more than 100% is actually coming in from the ageing related. I think that is all getting to. I think rest is all getting to [indiscernible]
But if you see on the gross basis the slippage provisioning is only 10% of the total provisioning on the cost basis.
Okay. And as a sequel to this query next quarter, because entire NPAs will be moving out from YES Bank. Can we assume that the provisioning will be significantly lower in Q3?
I would not be saying this because the regulations applicable to NPAs and the revolution that we able to security receipt, they remain the same. So it is only line that 15% cash would come and for remaining 85% of the net NPA, which would be converted into the security received, the provision implications would continue to be the same.
I now hand the conference over to Mr. Prashant Kumar for closing comments.
Thank you once again, everyone, and wish you and your families a really happy Diwali.
Thank you very much. On behalf of YES Bank Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.