IndusInd, Yes Bank tumble as UBS gives a thumbs down

Mumbai: Shares of Yes Bank plunged 13 per cent and those of IndusInd Bank slumped 5 per cent after global brokerage UBS slashed target price on both the lenders by 47 per cent and 18 per cent respectively.

Yes Bank’s shares hit a 52-week low of Rs 116.10 during the session before ending at Rs 117.20. Besides target price cut by UBS, Moody’s placing the bank’s rating under review for downgrade also weighed on the stock.

UBS cut rating on Yes Bank to Rs 90 from Rs 170 while retaining ‘sell’. The brokerage has downgraded IndusInd Bank to ‘sell’ from ‘neutral’ and lowered the target price to Rs 1,400 from Rs 1,700. Shares of IndusInd Bank ended at Rs 1,490.05 on Thursday. Yes Bank’s shares have fallen 65 per cent in the last one year and IndusInd Bank has lost 23 per cent in the same period.

“The ratio of lending to non-investment grade network companies compared with the main company is relatively high for Yes (3.1x) and IndusInd (5.2x), and this does not appear to be fully priced in,” said UBS.

The brokerage also said that concentration of lending to weak companies is also high for Yes Bank, Punjab National Bank and IndusInd Bank. These banks are the least preferred stocks for UBS.

Among corporate lenders, risk-reward is favourable for Axis Bank and ICICI Bank, said UBS.

In the case of Yes Bank, UBS has slashed earnings estimates by 79 per cent and 53 per cent for FY20 and FY21 respectively and it believes that the risk-toreward is unfavourable.

“We expect 255/ 200bps credit costs in FY20/21, which would be significantly higher than management guidance of 125 bps. Moreover, we believe that the secondorder effects of rising NPL on preprovision operating profit growth/ margins are not fully factored in by the Street,” said UBS.

UBS sees downside to IndusInd Bank’s earnings as credit costs are likely to exceed current expectations. “…credit costs could be higher at 150 bps, compared with company guidance of 65 bps in FY20,” said UBS.

The brokerage said that retail deposits as a percentage of external liabilities for IndusInd, is lowest the among banks in its coverage at around 20 per cent, which is a structural issue and often manifests in credit quality surprises. “At 3 times P/BV (price-to-book value), the stock is trading near its historical average P/BV, and we fear the risk of de-rating (to below average valuations) is high,” said UBS.

For the banking space, the brokerage said concentration risk from exposure to inter-related group companies has re-emerged following the default by a large group in September 2018. “While the NPL risk from large corporate loans should be well known by now, we believe the next level of risk could appear from leveraged corporates’ related companies (their networks),” said UBS.