Yes Bank Ltd

NSE:YESBANK

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to YES Bank Q3 FY '22 Analyst Conference Call. On the management panel, we have with us today, Mr. Prashant Kumar, MD and CEO, YES Bank; Mr. Niranjan Banodkar, Chief Financial Officer; Ms. Anita Pai, Chief Operating Officer; Mr. Rajan Pental, Global Head Retail Banking; Mr. Ravi Thota, Country Head, Large Corporates; Mr. Akash Suri, Country Head, Stressed 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.

[Prashant Kumar, CEO, MD & Director]

Very good afternoon to everyone, and thank you so much for joining the YES Bank quarter 3 earnings call. I would like to take this opportunity to wish you and your near ones a very happy and healthy new year. Of course, the start of the new year has seen a significant surge in the COVID cases across India and the world. However, importantly, as we have seen with our fellow employees and families, the impact has been significantly less severe on the health of the individual. In turn, after the blip, we continue to witness the resumption in business activity at a reasonably fast pace. We continue to remain optimistic on the underlying economic activities and India's and the bank's growth prospects. Coming to the quarter gone by, we are pleased to report another quarter of consistent improvement across all our core operating metrics as well as strategic objectives. During the quarter, bank has achieved important milestones, which I would like to highlight upfront. After a very long time, actually after September 2019, we have crossed INR 3 lakh crores balance sheet size. During the month of December, we acquired more than INR 1 lakh CASA customer, and we have also crossed the INR 10 lakh credit cards, which are active. Now all of this demonstrates a strong momentum in the franchise buildup. We also continue to focus on new customer products and propositions, like launch of YES Family, a future tax proposition for the entire family; [ daily gold ], which is an extended gold loan overdraft for existing customers. And to further deepen the physical presence in newer geographies, we have opened 22 branches and added 492 new YES bankers during the quarter. On the digital payment, we continue with our leading market share position in UPI, Aadhaar Enabled Payment service and NEFT, et cetera. Further, during the quarter, bank was awarded the Best ERP Integration and Most Innovative Transaction Banking Solution in COVID-19 at the Global Transaction Banking Innovation Award 2021. YES Bank is now part of the MSCI ESG indices. ESG is an important element of our strategy, and the bank is committed to reduce greenhouse gas emissions from operations across the country to net it net zero by 2030. The raw pointers demonstrate that our performance is in line with our strategic objective, as detailed in Slide 4 of our investor presentation. And we are on track to achieve 1% ROA by FY '23. Now let me come back to our quarter 3 result. We are consistently and sustainably delivering on our earnings and outcomes, and I won't like to get into too many details in each quarter as we continue to consistently show improvement in our underlying performance. However, I think it is important to highlight some of the key things, like on the deposit side, we are pleased to report that total deposits, which now stand at INR 184,000 crores, is 7.6% quarter-on-quarter, has gone up, and almost 47.5% Y-o-Y. The granular growth of the deposit franchise continued with CASA ratio at 30.4%. And CASA growth rate, which is twice the growth rate of the overall deposit. Saving account balances have grown by 42% Y-o-Y and 7.4% quarter-on-quarter, while current account balances have grown 54.7% Y-o-Y and 8% quarter-on-quarter. And the average current account average monthly balance have also grown by 74% Y-o-Y, and this is mainly on account of our digital solution ease to the e-commerce players and the fintech partners. The growth in liabilities has come despite reduction in interest rate, which is a reflection of our superior customer service and stakeholder confidence. Our cost of deposit is now below 5% and currently, 4.9% for the first time ever. On the advances side, we had set out a medium-term target of 60%-40% for the retail and the corporate mix. Given our strong underlying performance and corporate debulking, we have already reached 57%-43%, which is 300 basis points higher than the last quarter. An important data point to share on the corporate side is, like top 20 accounts contributed more than 50% of the reduction in the gross book over the last 1 year. Our wholesale nonfund book has also grown 7% Y-o-Y, which is actually helping us generate the annuity fee income. New business formation has been very strong. So in disbursements across retail, which is INR 9,313 crores, highest ever; SME, another INR 4,940 crores; and the wholesale banking, which is INR 4,760 crores. All 3 segments, retail, SME, wholesale banking, we are seeing a steady growth, which also works well for our growth aspirations as well as our guidance for FY '22 and beyond. On the profit and loss side, our NIMs have moved up by 25 basis points to 2.4%, and primarily due to 30 basis point drop in the cost of deposit, which is 4.9% as of now. The fee momentum in retail banking, which is the highest ever, continues with good growth in trade and remittances and third-party sales. On the cost side, the credit card business resumed, which leads to increase in cost and also the step-up of marketing expenses given the new product launches. We also launched FinBooster Credit Card in partnership with BankBazaar in October 21, and have started issuing NPCI RuPay-branded credit card from the company. On the asset quality front, the slippage has significantly dropped down by 50% to INR 978 crores as compared to INR 1,783 crores last quarter. We are seeing an improvement across retail and corporate slippage, resulting in GNPA coming down to 14.7% against 15% last quarter. Retail slippage significantly improved at INR 388 crores as compared to INR 888 crores in the previous quarter, while the corporate slippage were lower at INR 435 crores as compared to INR 750 crores last quarter. The net credit cost continues to be benefiting from the cash recoveries of INR 610 crores and upgrades of INR 573 crores. The overdue loans in 61 to 90 days bucket are stable, while in the 31 to 60 days bucket is higher by INR 1,600 crores quarter-on-quarter, predominantly on account of one large infrastructure group, which has been -- which is fully backed by the strong and the highly valued collaterals. The increase -- the marginal increase in the total gross restructured loans is on account of DCCO, COVID and MSME 2.0 restructuring during the quarter. We remain on track to achieve greater -- more than INR 5,000 crores of recoveries and upgrades as per our FY '22 guidance, and we expect the asset quality to continue to improve. The process to form the ARC and complete the transfer of legacy stressed assets is on track, and we expect to complete this exercise by March '22 or latest by the first quarter of the next financial year. On the capital side, we accreted capital by 15 basis points with total capital adequacy at 17.7% and CET at 11.6%. Since March '21, bank CET has increased by 40 basis points. We have an enabling approval to raise equity capital, but for now, capital is at a reasonable level. However, we will continue to evaluate the need for capital from a growth perspective. On the people front, bank has seen a net addition of 1,065 employees during the first 9 months of current financial year. To enable the employees to have a say in the future of their organization towards making YES Bank a trusted and successful institution, the bank is currently undertaking employee surveys, which we are naming it voice of YES. Additionally, we have launched an FS leadership program for top and senior management stressing on the conscious leadership. Our progress over the last 21 months has been validated by external stakeholders. In addition to CRISIL and CARE upgrade last year -- the quarter, Moody's has upgraded the credit rating of our bank this quarter to B2 from B3 and outlook changed to positive, reflecting their expectation of a further improvement to the bank's credit profile, driven by a cleanup of legacy stressed book and improvement to the capital and profitability. We can now open the floor for your questions.

[Operator]

[Operator Instructions] The first question is from the line of Mahrukh Adajania from Elara Capital.

[Mahrukh Adajania, Analyst]

Congratulations. Sir, my first question in the main tiers. So could you give some outlook on NPLs, as in where you see then the NPL ratio setting in, say, 1 year's time? Whether there are many recoveries lined up in the fourth quarter or any outlook for the fourth quarter or even longer term, say, 1 year? Also, any comments on the capital raise?

[Prashant Kumar, CEO, MD & Director]

So from the NPL guidance, I think as you would be aware, we are actually in the process of setting up a ARC, and we would like to shift our entire NPL portfolio to ARC, okay? So we would be expecting that once this transaction is over, we would be having almost like a 0 NPL kind of thing. So I think this is something which we are trying to do. The recoveries during the fourth quarter also. So I think it's not dependent on a single or few accounts. I think recoveries are happening across the different sectors and both on corporate, retail and different industrial segments. So I think we are going to see good recoveries in the fourth quarter also. And we are expecting more than INR 5,000 crores during the current financial year. We have already done INR 4,320 crores. So we would be definitely exceeding our target of INR 5,000 crores for the current financial year. And I think there has been -- there is still a lot of opportunities in terms of recoveries from this pool in the next financial year also, which would help us. Second thing on the capital base. As of now, we feel because in the last 9 months, we have been able to add 40 basis points on our CET1. But definitely, for the growth purpose, we would continuously evaluate. And whenever like there will be a right opportunity, we would go to the market for the purpose of growth capital.

[Mahrukh Adajania, Analyst]

Got it, sir. Sir, when is the -- when do you think will the ARC structure be fully approved and ready for transfer?

[Prashant Kumar, CEO, MD & Director]

So we are trying to say do it by the March end. But because of the COVID uncertainties and regulatory approvals, it may slip to the next quarter, means the first quarter of the next financial year, but we would try to conclude it by March end.

[Mahrukh Adajania, Analyst]

Got it. But you already have a soft nod from regulator, right?

[Prashant Kumar, CEO, MD & Director]

Sorry, can you again comment?

[Mahrukh Adajania, Analyst]

You already have a soft nod from regulator, correct?

[Prashant Kumar, CEO, MD & Director]

So I think that is something which I think we would say share at the opportunate time, okay? So I would not like to make any comment on that.

[Mahrukh Adajania, Analyst]

Got it, sir. Sir, you also have mentioned that your SMA-1 has risen because of an infrastructure group backed by good security. So what kind of infrastructure is that? Would it be power, road or is this multi?

[Prashant Kumar, CEO, MD & Director]

So I think the way we have worded, we -- basically, we were not wanted to be recognized by somebody. So I think that it remains like this, that would be better. But I think this is important, like this is a single account, single group and this is backed by the adequacy ratio.

[Operator]

The next question is from the line of Jai Mundhra from B&K Securities.

[Jai Mundhra, Research Analyst]

Sir, I have a question on your labeled exposure. So if I were to total your labeled exposure, that slipped the one already, so NPA plus NPI. And if I were to include technical write-off, it would be around INR 55,000 crores, INR 28,000 crores plus INR 9 crores plus 17 -- INR 16,000 crores, INR 17,000 crores. Now on that INR 55,000 crores already NPA/NPI, what you have done in the last, let's say, last year, you also did some INR 5,000 crores and maybe this year, you will also do INR 5,000 crores. But even that number is only, let's say, 10% only. So that would still mean that unprovided stressed would still be a bit higher. Sir, request, if you can suggest over the next 1 year or maybe 1.5 years, how much is the recoverability? Because INR 5,000 crores number looks good, but when you see in context, it is like 10% only. So how should we look at the recovery from this extended stressed piece?

[Prashant Kumar, CEO, MD & Director]

No, I think I would agree with you that INR 5,000 crores, if you see in isolation, is a good number. But as compared to INR 50,000 crores or INR 55,000 crores, it would look small. But I think there, at the same time, we also need to appreciate the challenges which we still face as a bank, we face in terms of legal resolution or the recoveries through the legal fees. So I think keeping in view those kind of constraints, which I think the entire banking sector faces, I think this recovery of -- the immediate recovery of INR 5,000 crores that too despite COVID, I think you need to give some credit to us for this. But definitely, this is -- another part, I think what we need to see that the entire pool -- if you see the entire pool together, it's a coverage of 78%, okay. So it means -- and if you see our track record on the recovery, we have been able to recover something around, say, 50%, 55% wherever we have done the recovery. So I think seeing this kind of highlight, there is a lot of, say, opportunities for recoveries in this pool, which will definitely happen over a period of time within that constraint, which we face in the system.

[Jai Mundhra, Research Analyst]

Right. So -- no, so I take your point, sir, that you have already provided 80%. What I was trying to understand, do you think that this pool, considering the recovery target that you -- recovery run rate that you have had, do you think that you don't have to provide any new [Foreign Language] here, at least on this INR 55,000 crores. Is that what you're seeing?

[Prashant Kumar, CEO, MD & Director]

The only thing would be, there are certain regulatory guidelines in terms of provision. So some of the provisions would come because of the hedging part, okay? Only thing would be timing. So if the recovery and the hedging would coincide with each other, there would not be any need to make further provision. Only thing would be if the hedging provision comes first and the recovery will come subsequently, then maybe for some time, we need to make some addition to either. So I think this would be something which would be difficult to anticipate, but I think the way we are seeing the recovery coming up, I really don't see any challenge in terms of making any additional provision for it.

[Jai Mundhra, Research Analyst]

So then if you wanted to, sir, name your -- name or provide a sector-wise kind of an allocation of your top 5 accounts where the recovery in absolute amount is likely to be the highest. I mean that will help us understand the progress because around this quarter, the corporate recovery is almost negligible. So just to understand, which are your 5 corporate exposures sector-wise, which can give you the maximum amount of recovery, if that is possible? Like maybe some diversified conglomerate, maybe some...

[Prashant Kumar, CEO, MD & Director]

No, I think that I really don't like to say. Put in the public domain may not be correct.

[Jai Mundhra, Research Analyst]

Okay. Understood. And second question is, sir, on your investment, I mean the investment -- standard investment, which are BB and below, so is there any reduction in this pool? Maybe you would have got something from a stressed telecom entity as, while stressed, may not be now. So did you get anything from that exposure? And how do you assess the riskiness of this BB and below pool of corporate investment, which is roughly around, let's say, INR 1,700 crores, INR 1,800 crores.

[Niranjan Banodkar, Group President & Group Chief Financial Officer]

This is Niranjan. So that also includes the NPI pool. In addition to that, there is one exposure in the telecom space, which we've seen already redemptions happen in that particular space over the last 2 months. So we are quite confident of the reduction here.

[Jai Mundhra, Research Analyst]

Assuming that were to happen, Sir Niranjan, how much would that be -- I mean so this riskiness of this entire pool should reduce very materially, right? I mean that is how one should understand.

[Niranjan Banodkar, Group President & Group Chief Financial Officer]

So there is no incremental provisioning that we anticipate from this particular pool.

[Jai Mundhra, Research Analyst]

Understood. Understood. And the third question is on DTA, sir. So on your capital slide, you have mentioned that some INR 6,000 crores of -- you were carrying some INR 6,000 crores of DTA, and that would be -- that would run off as and when banks sustain the profitability. So just to understand, let's say, hypothetically, you make a INR 100 PAT this year -- or next year, because you are carrying DTA and you'll be paying tax -- accounting tax, but your capital should be improving by not only PAT, but also the DTA reduction, right? In a way which is equivalent to our tax outlook. So your capital should increase by PBT. Is that the understanding because of your retail?

[Niranjan Banodkar, Group President & Group Chief Financial Officer]

Yes. I think your last statement was correct. Absolutely, spot on. To the extent you will have the profit before tax, you can assume that we will keep accreting that straight into the capital without deducting from a tax perspective. Because to that extent, you will have a review from the [ DTA ].

[Jai Mundhra, Research Analyst]

Right. Understood. And last data-keeping question there. If you have the ECLGS number, what is the outstanding disbursement? And is there any NPA out of that pool?

[Niranjan Banodkar, Group President & Group Chief Financial Officer]

So the outstanding book, there should be about INR 5,500 crores. I think we would have had some cumulative disbursement in the range of INR 7,500 crores, and I think the behavior of the book has been quite resilient and quite good.

[Operator]

The next question is from the line of Kunal Shah from ICICI Securities.

[Kunal Shah, Research Analyst]

So a couple of questions, sir. Sorry, again, to touch upon in terms of the provisioning. So standard asset provisioning has actually come off and I think towards the NP also, it's relatively low. So we had seen some flow through on the restructured side, even 31 to 60 day, the impact on -- we don't know maybe how it would behave in the next quarter. But would that call for a relatively higher provisioning? Because when we look at in terms of the credit cost, in fact, that's hardly anything. Whatever is the provisioning, almost INR 300-odd crores is towards the investments. So I wouldn't -- it would have been better to make some provisioning on either the restructure or this pool of SMA-1, which is going up because there is hardly any provisioning with this area.

[Prashant Kumar, CEO, MD & Director]

So Kunal, if you see in terms of our SMA-1 and SMA-2, and this is what we are seeing over the period, these are the accounts which remain in this category, but they don't slip, okay? So that's why we are not making any provision, and we don't see the possibility of those accounts slipping into the NPA category. That is one part. Second thing, in terms of restructured book. So on the restructured book, we already have a provision as per the regulatory guidelines, but we are really closely watching this pool, and we are not seeing this restructured pool appearing either in SMA-1 or 2. So I think the behavior of the restructured book so far has been quite good, and we are carrying a provisioning of something around 13%, 14% around this. So as of now, we don't see that requirement of making higher provision, either on the restructure or on our SMA-1 and SMA-2.

[Niranjan Banodkar, Group President & Group Chief Financial Officer]

Also, Kunal, can I add what we do see is provision for NPA at the net level. Some of the recoveries that we've had or we observed that we've had, effectively have meant that there's been some release of provisioning there, which has been used to make more provisioning in the NPA pool. The net is [ 2 25 ]. That essentially what we have been saying, that if you look at the stock for us of the provisioning that will come in, you will continue to have support from the recovery income through the course of the year. And I think that's something which will continue to play out. I think the good part that we've seen after the elevated, let's say, push over slippages that we had in June and September, both on corporate and retail, the new formation of NPLs has now has come down very meaningfully. So that's also kind of very promising from our vantage point.

[Kunal Shah, Research Analyst]

Sure, sure. And secondly, in terms of fee income, so there is maybe a better disbursements which are there. But sir, when we look at both the retail as well as corporate on a quarter-on-quarter basis, in fact, sir, that's pretty flat. So just want to get -- just to gauge as to how the trajectory on these fee income overall should be.

[Niranjan Banodkar, Group President & Group Chief Financial Officer]

So look, Kunal, I think fee income, you will see a very strong momentum that will play out. In fact, there has been an increase in the retail fees quarter-on-quarter, and there's been some pullback on the corporate trade and cash management, but that's because of some sluggishness that we had on the bullion. But I think this momentum, you will see over the next quarter itself, the momentum will be quite good.

[Kunal Shah, Research Analyst]

Okay. And lastly, with respect to this entire ARC structure, so whenever it would happen, maybe I think on the fair value assessment basis, whatever would have been the provisioning required, we would have already done it, and maybe either in terms of the additional provisioning at the time of our transfer also. Now do we see that happening at one go? And maybe we are just awaiting the fair value assessment for that point in time, and that's the reason maybe there is not the provision buildup, which is happening towards the stressed pool.

[Prashant Kumar, CEO, MD & Director]

So Kunal, the actual payment would depend on the clear valuation of that [ store ]. But I think in our understanding and the assessment on the basis of the individual loans, we have more than the adequate provisions on this. So I think even in the worst case, there would not be any requirement to make any additional provision, that the whole transaction would be the capital equity for us.

[Operator]

The next question is from the line of Sri Karthik from Investec.

[Sri Karthik Velamakanni, Lead Analyst of Banks]

On the margin front, were there any one-offs in this quarter with respect to the recovery that you may have made? Because it's now seeming as though you were -- reached a steady state. And incrementally depending on the yield and cost movement, your margins will [ lull ].

[Niranjan Banodkar, Group President & Group Chief Financial Officer]

So Karthik, there's actually no one-off. So what you see as a 20, 25 basis points bump up is actually a reflection on the improvement in the cost of deposits that we've seen, which has fallen below 5%. So that's a reflection of core margin performance into the NII.

[Sri Karthik Velamakanni, Lead Analyst of Banks]

On the other OpEx front, Niranjan, we see a sharp jump on a Q-o-Q basis. Is that a function of the disbursement for the quarter? Or is there any other additional investments that are going into the franchise there?

[Niranjan Banodkar, Group President & Group Chief Financial Officer]

It's actually multiple reasons. One is incidental expenses related to the resumption in the credit card, for example, some network charges. Those flow through to the other line item. Deposit insurance will flow through that line item. There have been a couple of campaigns that we've run during December, which were for the various product launches. So I think it's a composite function of business that has grown, which might explain about 50% of that. And there have been some specific one-offs that have also played out, including, for example, we did subscribe to a COVID insurance policy for the employees that in itself was about INR 13 crores, INR 15 crores kind of an insurance cost. So that's what explains the bump up.

[Sri Karthik Velamakanni, Lead Analyst of Banks]

A couple of slightly more medium-term questions. One is on the liabilities front. As we get into this calendar year, potentially looking at a tighter yield and tighter liquidity scenario, how do you see the cost of deposits evolving from here on? Are there more reasons for you to further reduce this even despite, let's say, some amount of near-term increases by the larger systems?

[Prashant Kumar, CEO, MD & Director]

So I think for -- I think even the reduction on the deposit side, which we have done in the past, has not been reflected fully so far because it would happen only at the time of the renewal of deposits. But I think going forward, though, like if you see 1 year fixed deposit rate, the difference between us and the larger banks has already come down to 55 basis points. But we expect there is still some opportunities for us to reduce both on fixed deposit as well as on the renewal side. So I think this will be a very, very calibrated thing, but I think there is a lot of opportunities available for us to reduce that.

[Sri Karthik Velamakanni, Lead Analyst of Banks]

And sir, just a last question from my end. While you mentioned restructured book behavior from an election point of view is performing well, what I'd be keen to hear is, as we get to Q1, Q2 of next financial, that is the June and September quarter, both for the restructure and the ECLGS portfolio, which are currently under moratorium, what will be the cash flow reset? So would the EMI increase by 50%? Would the EMI increase by 30%? And what will be the additional strain on cash flows from an underlying borrower perspective as these moratoriums come to an end? That will be my last question.

[Prashant Kumar, CEO, MD & Director]

No, I think the way that restructuring has been done and is being -- previously has been done, we have been very, very conservative. That is one part. We have not given like this -- has to be given to all the customers. So it was mostly on the need base. During the third quarter, we have also seen a lot of improvement in terms of the cash flow of the customer. And in large number of cases, they have also not used the dispensation, and they were actually servicing our interest on the cash flows. So I think we don't see that kind of thing. We have -- the repayment obligation of the customer would work during the, say, first or the second quarter of the next financial year. And if there is no further impact because of any other thing, like the fourth wave kind of thing and we are not seeing that impact during the third wave, so we don't see the possibility where the cash flows of the customer will be impacted.

[Operator]

[Operator Instructions] As there are no further questions from the participants, I would now like to hand the conference over to Mr. Prashant Kumar for closing comments.

[Prashant Kumar, CEO, MD & Director]

I would like to thank each one of you for taking time out for the earnings call. And wish all of you again, and your families, a very good health and prosperity. Thank you.

[Operator]

Thank you. Ladies and gentlemen, on behalf of YES Bank, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.