Goldman Sachs: 4 Reasons for ‘Sell’ Rating on YES Bank

Goldman Sachs has downgraded YES Bank’s rating to ‘Sell’ today, pointing out key challenges to its profitability. These include a lack of a robust competitive advantage (moat), along with hurdles like higher funding costs, heavy reliance on retail customers, limitations in distribution capacity, and the potential for credit costs to stabilize or rise.

Goldman Sachs has set a target of Rs 16 for YES Bank Ltd and has expressed concerns about the private lender’s fundamentals. The bank’s margin profile remains subdued, and any improvements in credit costs appear to have bottomed out, which could result in a low return on asset (ROA) of 0.3 per cent in FY24. The foreign brokerage believes that the current valuations are high, leading them to downgrade their rating on the bank from ‘Neutral’ to ‘Sell’.

Despite significant strides in repairing its balance sheet, including improvements in non-performing loans (NPLs) and better liquidity management, YES Bank still faces challenges, according to Goldman Sachs. The investment bank believes that the lender lacks a strong competitive advantage (moat) and identifies four key challenges to its profitability: higher cost of funds, reliance on a retail customer base, limitations in distribution capacity, and the stabilization or potential increase in credit costs. These factors collectively pose obstacles to YES Bank’s financial performance.

Goldman Sachs mentioned that YES Bank’s cost of funds could see improvement over time as the bank enhances its CASA (Current Account Savings Account) profile or experiences significant enhancements in liquidity. However, it pointed out that the competition is intense in the retail asset segment, limiting the potential for raising yields.

The investment bank emphasized the need for YES Bank to bolster its distribution capacity, which could keep its cost-to-income ratio elevated. Furthermore, Goldman Sachs observed that the bottoming out of credit costs has largely occurred, and the slippage ratio is trending upwards towards normalization.

Goldman Sachs expects YES Bank’s return on assets (ROA) to increase from 0.25% in 3QFY24 to 0.8% in FY26E. This anticipated improvement is based on the bank’s margin enhancement and operating leverage enhancements over the next two years. However, this projection falls short of their previous expectation of achieving a 1.1% ROA by FY26. Despite improvements, the bank’s return on equity (ROE) is expected to remain sub-par due to ongoing challenges. Consequently, Goldman Sachs views the current valuations as rich.

Goldman Sachs has reduced its earnings per share (EPS) estimate for YES Bank by 43% in FY25 and its book value per share (BVPS) by 6.6%. Despite this, they have maintained their 12-month target price at Rs 16, suggesting a downside of 40%. This stands in contrast to the average 21% upside for Buy-rated stocks in their coverage.

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