Will Yes Bank’s turnaround story have a happy ending?
Source: Live Mint
In 2020, Yes Bank’s share price plummeted following an RBI crackdown on its mounting bad loans. The central bank intervened, took over the lender, and initiated its reconstruction. This sparked a series of major decisions that not only made the stock highly volatile but also a favourite among traders and short-term investors, particularly those capitalizing on dips and rallies. Technical analysts also extensively covered the stock during this period.
Yes Bank’s stock price between 2020 and 2024
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What drives Yes Bank’s share price momentum?
Bank bailouts typically follow a familiar playbook. A bank lends to companies using depositors’ funds. When borrowers default, these loans turn into gross non-performing assets (NPAs), forcing the bank to set aside additional capital as provisions. This erodes profitability and compels the bank to raise more capital to repay depositors and issue fresh loans.
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For Yes Bank, the turning point came in March 2020 when the RBI stepped in with a ₹50,000 crore rescue package as the bank faced a severe deposit run. Over the next four years, Yes Bank’s stock oscillated between phases of consolidation and breakout, driven by several pivotal events.
2020: The first breakout came in July when Yes Bank raised ₹14,272 crore through a follow-on public offering (FPO). State Bank of India (SBI) and other banks also infused capital, acquiring stakes in the lender. This financial boost allowed Yes Bank to repay the RBI’s ₹50,000 crore and stabilize its operations. Between August and December 2020, the stock surged 59% to ₹19.45.
2022: Another significant surge of 40% occurred between June and September as Yes Bank exited the RBI’s reconstruction scheme. The bank appointed a new board and chief executive, Prashant Kumar, and raised ₹8,900 crore from private equity investors Carlyle and Advent International. In December, it formed an asset reconstruction company (ARC) with JC Flowers and sold ₹48,000 crore of stressed assets, significantly reducing its GNPA from 16.8% in FY20 to 1.6% by Q2FY25. This restructuring propelled the stock 37% higher between November and December 2022.
2023-2024: As Yes Bank returned to profitability and improved its fundamentals, the stock gained 20% between March and July 2023. The momentum peaked between October 2023 and February 2024, with a 96% rally—its steepest since the turnaround began. This surge was fuelled by the RBI’s approval for HDFC Bank to acquire up to 9.50% of Yes Bank’s paid-up share capital.
Note: Every breakout phase has been preceded by a capital injection and followed by a consolidation phase, keeping the stock range-bound during interim periods.
Next breakout opportunity for Yes Bank
The next potential breakout for Yes Bank could stem from SBI’s stake sale. As the largest shareholder, SBI holds a 26% stake in Yes Bank. This stake was acquired in March 2020 under RBI’s reconstruction plan, which mandated a three-year lock-in period. The RBI also limits a bank’s ownership in another bank to 5%, unless special approval is granted.
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With the lock-in period ending in March 2023, SBI has been seeking a strategic buyer for its stake, valued at ₹18,420 crore. Market speculation suggests that SBI aims to finalize a deal by March 2025, though neither SBI nor Yes Bank has confirmed these reports.
News reports indicate that Japanese lender Sumitomo Mitsui Banking Corp. and Dubai-based Emirates NBD are in advanced talks to acquire a majority 51% stake in Yes Bank. Separately, Bloomberg reported that Abu Dhabi Bank PJSC and Mitsubishi UFJ Financial Group are also potential suitors.
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If these reports are accurate, could a stake sale help Yes Bank’s share price break out of the ₹21 price band? Such a move would also hinge on RBI’s approval for the stake sale, especially if it involves a foreign buyer.
Analysts: Momentum vs valuation
Developments around SBI’s stake sale have kept Yes Bank’s momentum high, but performance remains mixed. While technical indicators highlight potential consolidation and breakout opportunities, fundamental analysts advise caution due to valuation concerns.
Technical analysts are wary of entering Yes Bank at the current ₹21 price level.
Jigar S Patel, senior manager, technical research, at Anand Rathi, said, “Support will be ₹19 and resistance at ₹21.5. A decisive move above ₹21.5 may trigger a further upside towards ₹24. The expected trading range will be between ₹18 and ₹24 in the short term.”
Fundamental analysts echo this cautious stance, advising existing investors to hold while waiting for clarity on SBI’s stake sale. Fresh entries, however, are not recommended.
Kotak Institutional Equities, as cited in a Mint article from August, considers the risk-reward ratio “unfavourable” at ₹21, as the valuation exceeds its fair value given Yes Bank’s 3.1% return on equity (ROE). The firm believes a re-rating would require a sharp expansion in net interest margins, which is unlikely in the near term given potential RBI rate cuts.
ICICI Securities, as referenced in the same article, notes that the market has likely priced in the turnaround. The firm remains cautious about the faster-than-expected rise in priority sector lending (PSL), pointing out that aggressive corporate loan growth previously led to loan defaults and deposit runs for Yes Bank.
The question remains: What is it about Yes Bank’s share price that has fundamental analysts so wary?
Valuation concerns
Yes Bank has delivered impressive earnings growth in recent quarters, but its 0.34% return on assets (ROA) remains well below the industry median of 1.65%. This disparity stems from the bank’s strategy of maintaining higher deposits relative to advances. In Q2 FY25, deposits grew 18.3% year-over-year (YoY) to ₹2.7 trillion, while net advances rose 12.4% YoY to ₹2.35 trillion. This strategy has successfully reduced the credit-deposit ratio to 84.8% in Q2 FY25 from a steep 163% in FY20, but it has also kept returns on advances relatively low.
To mitigate concentration risk, Yes Bank has been increasing the share of retail and small and medium enterprise (SME) loans in its portfolio—from 42% in FY21 to 59% in Q2 FY25. The bank has also been focusing on cost reduction and operational efficiency to boost profits. In Q2 FY25, net profit surged 145.6% YoY, driven by a 26.7% decline in provision costs, aided by a recovery of ₹285 crore in security receipts. This accelerated profit growth has lifted the bank’s three-year profit compounded annual growth rate (CAGR) to 33%.
Moody’s recently upgraded its outlook for Yes Bank from ‘stable’ to ‘positive’, citing expectations of gradual improvement in its depositor base and lending franchise, which could enhance core profitability over the next 12–18 months. Private equity investor Carlyle also sees growth potential in the under-served SME lending space.
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However, much of this optimism appears to be factored into Yes Bank’s valuation. The stock is trading at a price-to-book (PB) ratio of 1.43x, which is higher than its five-year median PB of 1.1x and the industry median of 1.24x. These elevated valuations make the stock sensitive to price momentum, with an unfavourable risk-reward ratio that warrants caution.
In a nutshell
Yes Bank has moved past its FY20 challenges, such as a heavy concentration on wholesale loans, high GNPA levels, and reduced liquidity. However, the journey to fully align its credit profile and profitability with Indian peers is far from over.
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Turnaround stories often leave investors cautious, but the banking sector has seen examples of such recoveries delivering strong returns. Public sector banks like Punjab National Bank and UCO Bank began generating shareholder value in October 2022, benefiting their largest stakeholder—the government.
For more such analysis, read Profit Pulse.
Whether Yes Bank’s turnaround will evolve into another success story for its shareholders remains to be seen.
Note: This article relies primarily on data from www.Screener.in. In cases where data was unavailable, alternate but widely recognized and accepted sources have been used.
The purpose of this article is to share interesting charts, data points, and thought-provoking insights. It is NOT a recommendation. Readers are strongly advised to consult their financial advisor before making any investment decisions. This article is strictly for educational purposes only.
About the author: Puja Tayal is a seasoned financial writer with over 17 years of experience in fundamental research. Her articles blend well-researched insights with comprehensive analysis of companies’ performance.
Disclosure: The writer and her dependents do not hold any of the stocks, commodities, cryptos, or other assets discussed in this article.
