Shares of Yes Bank Ltd plunged on Tuesday erasing about $2.28 billion in market value after the private lender posted an unexpected loss in the March quarter, highlighting the challenges facing the private lender.

The shares fell 29% to ₹168 on the NSE, a level last seen on 10 December 2018. It was the biggest single-day fall since the bank’s listing on 12 July 2005.

Investors have been worried after Yes Bank’s performance in the March quarter. This led brokerage firms to downgrade the stock and cut their target prices by as much as 40%.

Yes Bank has a new chief executive Ravneet Gill since 1 March who has promised to clean up the bank’s balance sheet. The March quarter results may, therefore, be considered as ‘kitchen sinking’ but analysts are cautious that the bank has multiple challenges such as lower net interest margin, fees, growth, weaker asset quality and capital.

Gill has unveiled a four-pronged long-term strategy. Many analysts say the turnaround will be gradual given challenges across key metrics—capital, falling revenue yields, falling current account saving (CASA) ratio and asset quality. Also, shift to granular retail liabilities will be tough as even large banks are facing challenges, they add.

Brokerage Macquarie has admitted to overlooking the risks from the structured finance business of Yes Bank and has downgraded the stock by a full two notches.

“We must eat humble pie today and admit we underestimated risks in structured finance. We got the call wrong," analysts at Macquarie said in a note on Monday. It cut FY20-21 earnings per share (EPS) by 45% each and target price by 40%. “The new CEO’s flag of a 3 times QoQ increase in ‘BB’ and below rated accounts, despite aggressive slippages in Q4FY19, comes as a material negative surprise. In addition, flagging off of aggressive accounting practices in fee income and weakness in retail franchise further dampen our fundamental view on the robustness of the business model," Macquarie added. Yes Bank on Friday reported a loss of ₹1,507 crore for March quarter against a year-earlier profit of ₹1,180 crore. Total provisions during the quarter jumped more than nine-fold to ₹3,661.7 crore from ₹399.64 crore.

Several brokerages downgraded the stock after the results. According to Bloomberg, out of the total analysts covering the stock 20 have a ‘buy’ rating, 12 have ‘hold’ and 18 have ‘sell’ rating. A year ago in March 2018, 44 analysts had a ‘buy’ rating, 7 had ‘hold’ and 4 had ‘sell’ rating.

Stating that there are multiple pressures for Yes Bank as it shifts from its historic focus on structured credit, Morgan Stanley said that its overall return on equity (RoE) at normalized leverage would be 10-12% over the next three years, which is unattractive and should drive valuations below book.

“New CEO highlighted that Yes Bank’s traditional focus had been on structured finance and upfront fees. This had implied less focus on retail assets and liabilities. The bank’s new strategy will be to focus on retail and digital franchise. This is the right strategy, but it will take time. Large banks are struggling to grow retail liabilities and for Yes to gain granular retail funding will be tough," Morgan Stanley said in a report on 29 April. Morgan Stanley is “underweight" on the stock and lowered its target price to ₹125 from ₹160 a share.

Maintaining a ‘sell’ rating, Kotak Institutional Equities cut its target price to ₹170 valuing the stock at 1.8 times March 2021 book value for weak RoEs in the medium term but likely to improve gradually. “However, clear risks to fair value and earnings exist as we need to see the progress of capital adequacy) and stressed portfolio," it said in a report on Monday. Analysts at Kotak said that the new business strategy of Yes Bank, similar to other private banks, has begun but near term high credit costs for the back book, weak RoEs would make this transition painful in the medium term. “This makes it too risky to back today even if the new strategy is acceptable," it said.

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