Macquarie says mea culpa for YES rating, cuts price target by 40%

Macquarie Capital Securities said it got its assessment on YES Bank wrong – a stock which they have been ‘constructive’ on for the past eight years. It has double downgraded the stock to underperform and slashed the target price by 40 per cent to Rs 165 – the second lowest on the street after Morgan Stanley which has a target price of Rs 125.Macquarie said it has been constructive on YES Bank’s ability to thrive in a risky business segment like structured finance. Suresh Ganapathy, head of financial services research at Macquarie, termed the call on YES Bank as the biggest mistake of his professional life as analyst.“We must eat humble pie today and admit we underestimated risks in structured finance. We got the call wrong,” said analysts at Macquarie led by Ganapathy. Macquarie had an ‘outperform’ rating on YES Bank earlier.YES Bank on Friday posted a loss of Rs 1,507 crore for the March quarter compared to a profit of Rs 1,180 crore a year earlier.The bank made total non-tax provisions of Rs 3,662 crore, more than nine times the Rs 400 crore reported a year earlier and nearly seven times the Rs 550 crore reported in December 2018, even as gross NPAs rose to 3.22 per cent of loans from 2.10 per cent in December. The loss was amplified by provisions against bad loans to an infrastructure conglomerate and an airline as the lender’s first non-founder CEO Ravneet Gill began a cleanup act.Loan book clean-up, investments in retail business and pivoting of business model within corporate segment should keep return ratios of YES Bank subdued for long, said Macquarie, cutting EPS estimate by 45 per cent.The new CEO’s flag of a sequential increase of three times BB and below rated accounts, despite aggressive slippages in the fourth quarter of the financial year ended March, comes as a material negative surprise, said Macquarie. Flagging off of aggressive accounting practices in fee income and weakness in retail franchise further dampen fundamental view on the robustness of the business model, added Macquarie.The stock has declined 11 per cent in the last two weeks ahead of its result, ending down 0.1 per cent at Rs 237.4 on Friday. YES Bank shares have fallen 32.6 per cent in the last one year, underperforming the Bank Nifty which has gained 17.5 per cent during the same period.Besides Macquarie, other brokerages such as BoB Capital and Emkay Global have also downgraded the stock.“Near-term headwinds from new asset quality shocks, elevated credit costs, higher opex and slower growth will remain overhang on the stock,” said BOB Capital Markets.While structural changes by the new leadership are geared to building a solid franchise in the longrun and are essential to restore investor confidence, any re-rating of the stock will hinge on effective execution of the new strategy, it said. 69098580 69089813

from Economic Times http://bit.ly/2vsTjwL
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