Global brokerage firm JPMorgan has significantly downgraded its outlook for private sector lender YES Bank Ltd, slashing its price target by 38%. The new target stands at Rs 13.10, a substantial reduction from the previous Rs 21. This revised assessment comes in the wake of a crucial Supreme Court judgment concerning the write-off of Rs 8,415 crore in Additional Tier-1 (AT-1) bonds.
Supreme Court Ruling Impacts Capital and Earnings
According to JPMorgan, the Supreme Court's adverse ruling is anticipated to have a material impact on YES Bank's capital position and overall earnings. The brokerage highlighted potential downside risks, particularly if coupon payments on the reinstated AT-1 bonds are revived. Such a revival could further strain the bank's financial health.
Following this development, JPMorgan has adjusted its earnings estimates for YES Bank. The brokerage pared its FY27, FY28, and FY29 earnings projections by 136.3%, 7.7%, and 19.7%, respectively. The potential resumption of annual coupon payments, estimated at approximately Rs 770 crore, could further reduce FY28 and FY29 earnings by an additional 10-11%, weighing heavily on profitability.
Structural Weaknesses and Future Challenges
Despite an reported 65% year-on-year increase in Q2 FY27 net profit to Rs 1,080 crore, JPMorgan pointed to several unresolved structural weaknesses within YES Bank. These include a subdued return on equity, relatively slow business growth, and an underperforming deposit franchise. These factors collectively limit the bank's potential for a significant valuation re-rating, even with its seemingly inexpensive valuation at around 0.87 times its estimated FY28 price-to-book value.
Furthermore, the brokerage cautioned that the transition to Expected Credit Loss (ECL) provisioning norms in FY28 could exert additional pressure on the bank's capital adequacy buffer. While an additional equity investment by Japan's SMBC remains a potential catalyst, the overall outlook is tempered by earnings uncertainties and ongoing structural challenges.
On Monday, YES Bank's stock closed 2.70% higher at Rs 15.57, with its market capitalization rising to Rs 48,873 crore. However, its shares are currently trading below key moving averages, indicating prevailing market caution.