YES Bank Solvency Simulation with Covid-19 Coverage Scenarios

YES Bank: Par Is Plenty- Move to Underweight

India-Headquartered Banks: Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run

Yes Bank Volunteers Data on Its Asset Quality; But Will Other Banks Be So Transparent?

Gravity Works As WeWork Doesn't; Now Plan B

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

The means to an end matters for credit investors. Although net income may remain unchanged, operating pre-provision profits can be inflated by moving income up the P&amp;L statement. Unadjusted, this inflates recurrent earnings power.In our opinion, <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">YES Bank's (</a><a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">YES IN</a>)<a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener"></a> interest and non-interest income are inflated relative to more conservative accounting standards. This overstates operating profits and makes cross-border comparisons difficult.  Recoveries on the principal of loans previously written-down are recognized as non-interest revenues rather than offset against new loss provisions or recognized as non-recurrent earnings. Also, interest recovered appears to be written back immediately within non-interest revenue rather than accreted over the life of the rescheduled loan or booked as a gain from the sale of assets, as the case may be. These actions inflate operating revenues, efficiency ratios, and operating pre-provisions profits. Furthermore, the firm is recognizing interest income on loans overdue more than 90 days and not classified as non-performing as per India’s Supreme Court order of 3 Sept 2020. In addition to inflating pre-provision profits and efficiency ratios, this also materially increases net interest margins. This confluence meaningfully inflates YES Bank’s pre-provision income. Adjusted for these items, recurrent earnings power is one-third reported pre-provision profits. In fact, recoveries and standstill interest represent 41% of YES Bank’s total income, versus only as much as 14% at <a href="https://www.smartkarma.com/entities/axis-bank-ltd" target="_blank" data-smartkarma-citation="entities:768:1" rel="noopener">Axis Bank Ltd (AXSB IN)</a>. YES Bank has a much lower loss absorption ability from continuing operations than meets the eye. This can have negative solvency implications, long-term, if left untreated.

The means to an end matters for credit investors. Although net income may remain unchanged, operating pre-provision profits can be inflated by moving income up the P&amp;L statement. Unadjusted, this inflates recurrent earnings power.In our opinion, YES Bank's (YES IN) interest and non-interest income are inflated relative to more conservative accounting standards. This overstates operating profits and makes cross-border comparisons difficult.  Recoveries on the principal of loans previously written-down are recognized as non-interest revenues rather than offset against new loss provisions or recognized as non-recurrent earnings. Also, interest recovered appears to be written back immediately within non-interest revenue rather than accreted over the life of the rescheduled loan or booked as a gain from the sale of assets, as the case may be. These actions inflate operating revenues, efficiency ratios, and operating pre-provisions profits. Furthermore, the firm is recognizing interest income on loans overdue more than 90 days and not classified as non-performing as per India’s Supreme Court order of 3 Sept 2020. In addition to inflating pre-provision profits and efficiency ratios, this also materially increases net interest margins. This confluence meaningfully inflates YES Bank’s pre-provision income. Adjusted for these items, recurrent earnings power is one-third reported pre-provision profits. In fact, recoveries and standstill interest represent 41% of YES Bank’s total income, versus only as much as 14% at Axis Bank Ltd (AXSB IN). YES Bank has a much lower loss absorption ability from continuing operations than meets the eye. This can have negative solvency implications, long-term, if left untreated.

YES Bank Q3 Results: Recurrent Earnings Power at One-Third Pre-Provision Income