Global investment bank Goldman Sachs has reaffirmed its 'Sell' rating on YES Bank Ltd. following the Indian lender's September quarter business update. The firm maintains that any future improvement in YES Bank's return on assets (RoA) will be constrained by moderating Current Account Savings Account (CASA) ratios and the projected tapering of legacy loan recoveries starting from fiscal year 2028.
Goldman Sachs projects YES Bank's RoA to remain capped within the 1-1.2 percent range, even with the reduction of low-yielding Rural Infrastructure Development Fund (RIDF) assets. Coupled with a weaker starting capital position, with Common Equity Tier 1 (CET1) at 14 percent, and what it deems expensive valuations (1.1 times FY28E Price-to-Book for an expected 1 percent RoA), the investment bank considers the risk-reward ratio for YES Bank shares to be unfavorable. Goldman Sachs has set a target price of Rs 22 for the stock.
Key Investor Focus Areas for Q2 Results
Heading into YES Bank's second-quarter financial results, Goldman Sachs anticipates investor attention will primarily center on two critical areas: the bank's margin trajectory on a normalized basis and the path of its fee income. This focus on fee income is particularly pertinent given the potential impact of proposed insurance regulations on distribution commissions, which could affect the bank's non-interest income.
However, Goldman Sachs notes that any negative impact from these insurance regulations may be partially mitigated by the benefits derived from Merchant Discount Rate (MDR) on UPI P2M transactions, which became effective on October 15, 2026. Additionally, the outlook on credit cost normalization over the coming years will be closely monitored, especially as the pace of recoveries from the bank's legacy loan book begins to moderate.
Q2 Business Update Highlights
Regarding the Q2 business update, YES Bank reported receiving FCNR-B deposits totaling Rs 18,700 crore, with a significant 81 percent of this funded by foreign currency term loans. On a normalized basis, the bank's loan growth moderated slightly to 17.7 percent year-on-year, down from 18.3 percent in the previous quarter. Sequentially, loan growth stood at 3.3 percent, compared to 4.3 percent last quarter.
Including Foreign Currency Term Loans (FCTL), total loans grew by 23.8 percent year-on-year and 8.6 percent quarter-on-quarter, surpassing Goldman Sachs' estimates of 20 percent YoY and 5 percent QoQ. Normalized deposit growth also saw a moderation to 13.2 percent year-on-year from 14.3 percent in the prior quarter. Despite this, sequential deposit growth was robust at 6.5 percent, a notable improvement from a 1 percent decline in the last quarter. This growth was driven by a sharp increase in Certificates of Deposits (Rs 11,400 crore) and healthy term deposit growth (+5.9 percent QoQ), alongside a 3 percent quarter-on-quarter growth in CASA deposits. Including FCNR-B, overall deposits surged by 19.5 percent YoY and 12.3 percent QoQ, exceeding Goldman Sachs' projections of 15 percent YoY and 8 percent QoQ.
At 10:40 am on the day of the report, YES Bank's stock was trading up 1.8 percent at Rs 21.08 per share. The 12-month Bloomberg consensus target price of Rs 21.09 suggests that the upside for the stock may be limited.