Yes Bank Limited (YESBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Yes Bank's Q2 FY '26 Earnings Conference Call. On the management panel, we have with us today Mr. Prashant Kumar, Managing Director and Chief Executive Officer; Dr. Rajan Pental, Executive Director; Mr. Manish Jain, Executive Director; Mr. Niranjan Banodkar, Chief Financial Officer; and Mr. Sunil Parnami, Head of Investor Relations and Sustainability. Mr. Prashant Kumar will now give you an overview of the results, which will be followed by a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. Before we further proceed with this call, please note, while all efforts will be made that no unpublished price-sensitive information would get shared, in case of an inadvertent disclosure, the same would, in any case, form part of the proceedings of the call -- or the recording of the call. Further, some of the statements made in today's call could be forward-looking in nature. A note to this effect is provided in the Q2 FY '26 results presentation itself shared on the bank's website. I now hand the conference over to Mr. Prashant Kumar. Thank you, and over to you, sir.

Thank you. A very good afternoon, and thank you for joining us for our quarter 2 earnings call. On this call, I am accompanied by the senior leadership team members of the bank. At the outset, I would like to wish all of you and your family a very happy and prosperous Dhanteras and Deepavali. I'm aware of the fact that there are many results and calls lined up for today. Hence, I would keep my remarks brief and touch only on few of the strategic and thematic trends. This quarter, we saw a good traction across several key operating metrics. Starting first with deposits, wherein there was a sustained momentum and continued outperformance vis-a-vis the industry, particularly in CASA deposits. The bank's total deposits at INR 2.96 lakh crores have grown 6.9% Y-o-Y and 7.4% quarter-on-quarter. This strong sequential traction despite the rate cuts action taken by the bank is a reflection of our strong Yes Bank franchise and of a very well-executed deposit strategy. Within the overall loan and deposit growth, the CASA deposits registered stronger growth at 12.5% Y-o-Y. And on average quarterly balances basis, the CASA growth was even higher at 13.6% Y-o-Y. The CASA ratio now stands at 33.7%, which is up by 170 basis points Y-o-Y and 90 basis points quarter-on-quarter. On customer segment basis, Retail and Branch Banking-led deposits have grown 13.7% Y-o-Y. The CASA ratio in this segment stands at 39.6%, which is up 210 basis points Y-o-Y and 140 basis points quarter-on-quarter. While the competitive intensity continues to remain high in deposits, we remain confident in executing our strategy with a sharp focus on granular segment and quality CASA acquisition offering across the cross-sell and the upsell opportunity. Secondly, on advances, we crossed a critical milestone of INR 2.5 lakh crores this quarter, registering a growth of 6.4% Y-o-Y and 3.8% quarter-on-quarter. There has been a strong pickup in disbursement on a sequential basis across all the customer segments. We believe that the risk-based calibration in our Retail segment is now largely behind, and we should see stronger traction going ahead. Our Retail segment disbursement grew around 20% quarter-on-quarter basis. In the Commercial and Corporate segments, our sanction and new limit setup have nearly doubled on a sequential basis. Moreover, we believe that the conducive macro environment in the form of lower interest rates, consumption boosting measures as well as ongoing festive season, all could result in a pickup in industry credit growth from here on. Thirdly, another important trend during the quarter has been improvement in our asset quality. Fresh slippages have reduced to 2% of advances from 2.4% in previous quarter. Overdue advances have also reduced across segments, including Retail. Our core credit cost trajectory has actually improved during the quarter after normalizing for recoveries from security receipts and one-offs. We have also improved our provision coverage ratio to 81%, which is one of the best amongst peers at the moment. The NPA ratios are flat on a quarter-on-quarter basis with GNPA at 1.6% and net NPA ratio at 0.3%. The fourth important factor is that during the quarter, we have been able to broadly maintain our net interest margins at similar levels as last quarter, as the asset repricing impact was largely offset by reduction in RIDF balances and high-cost borrowings as well as deposit rate cuts and repricing. Since any further rate cuts by RBI, we believe that NIMs have bottomed in this quarter. While we continue to see intense pressure on loan spreads, particularly within the Wholesale segment, we expect the benefit to flow through term deposit repricing, continued RIDF reduction and CRR cut. Keeping these dynamics in mind, we continue to balance between growth vis-a-vis profitability. The fifth important highlight is our good performance during the quarter in cost-to-income ratio. Despite lower treasury income during the quarter, our cost-to-income ratio has remained flat at 67.1%. In terms of income, I have already spoken about the net interest margins. On fees, we saw a strong traction across ForEx, processing fee and third-party distribution fees during the quarter. What has been heartening is that we have been able to achieve this pickup in our business momentum in disbursements, deposits as well as fees, while keeping a tight control on our operating cost. Our OpEx has grown only by 0.6% on Y-o-Y basis despite higher PSLC cost and has actually declined 4.2% quarter-on-quarter basis. Last thing, which I wish to highlight is that the bank has delivered yet another quarter of robust profitability. Net profit at INR 654 crores have grown 18.3% Y-o-Y. If we normalize for the income tax refund received last year in quarter 2, our profit growth is around 30% on Y-o-Y basis. This has driven the robust operating profit at INR 1,296 crores, which has grown 32.9% Y-o-Y. Even normalized for treasury gains, the operating profit has grown 26.6% Y-o-Y and 31.8% quarter-on-quarter. Now moving to some of the other highlights. The SMBC transaction was closed during the quarter, and with purchase of further stake from one of the private equity investors, the combined stake for SMBC now stands at 24.2%. State Bank of India continues to be a major shareholder with more than 10% holding in the bank. Two of the nominee directors from SMBC have already joined our Board, and they bring their vast global expertise, which will be extremely helpful for the bank in this fast-evolving banking landscape. We also received credit rating upgrades from 2 domestic rating agencies during the quarter, namely CRISIL and India Ratings. The bank is now rated AA- by all the domestic credit rating agencies, which is the highest level since March 2020. This is a reflection of the strengthened capital position, robust governance and improved business performance of the bank. The bank has set a target of opening 80 new branches for the year, and we have successfully opened 43 new branches till date. In conclusion, I would like to highlight that the bank has successfully delivered an ROA of 0.7% for the first half year, and we remain on track to achieve the stated objective of 1% ROA by FY '27. I once again wish all of you a happy and prosperous Dhanteras and Deepavali on behalf of the Yes Bank team. We can now open the line for questions.

[Operator Instructions] Our first question comes from the line of Harsh Modi from JPMorgan.

The question is more regarding the focus of your largest shareholder now, SMBC, over, let's say, next 2-year period. One, you articulated the 1% ROA target. Could you get into some details of how would you reach that target? What are the main levers over the next 12, 18 months? And what is additional that SMBC is bringing to the table here?

Thank you, Harsh. So our levers for ROA continue to remain the same. And if you look through the DuPont, I think it's quite easy to pick up that NIM expansion is going to be a material contributor to the ROA because currently, we are operating at about 2.5%. And clearly, that's not the optimal position to be at. Now if I just, therefore, spend maybe 2, 3 minutes on the NIM drivers. So we've also put out in our presentation that there's this one big drag, which comes in from the RIDF deposits, which currently contribute about 8% of stock, but of course, had seen a peak of about 11% of our total assets. Now that book, as it continues to run down, will start accreting margins. Some of the benefits we've seen over the last 1 year. But clearly, there is still a large part of the rundown to play out. So that's going to be one critical driver over the next 1 to 2 years, which will give us margins. That's number one. Number two, it's a little bit more, I would say, a journey that has started on the rate reduction on our deposits. Of course, it gets a bit noisy because we've also seen some massive rate reductions by RBI, and therefore, some of the noise plays out on the mismatch between loan repricing and deposits. But I think there is also -- if you kind of eliminate the noise between this timing mismatch, I think the bank has also structurally taken some decisions to work on reducing rates. So if you look at our savings account rate, we have seen headline rates actually reduced by 200 basis points on our savings account, and that has meant, at a blended level, we've seen more than 150 basis points of reduction in our savings account, right? Now as the TDs will start repricing, and we start accreting value out of our TD repricing, because not all of the TDs have got repriced, the benefit of this SA rate cut will start playing into the margins effectively, right? That's the second part on the deposit. The third -- and it's not been an easy journey, I have to admit, but clearly, we cannot shy away from the fact that we will have to work hard to keep acquiring more quality customers and keep expanding our CASA ratio. Because that's really very fundamental to banking to have a solid liability franchise. We do believe -- I think our journey is firmly underway. And we do believe that with SMBC coming through, we should also get levers to further drive that strategy faster, right, whether it is transaction banking, cash management, ability to access a lot more corporate clients, and at the same time, look to build granular deposit, and that gives us the confidence to keep reducing rates on that. So I think that's the second part. On the asset side, which is on the advances, Prashant did mention in his opening remarks that if you think about what's playing out in the last 1.5 years from our vantage point is that the mix of Retail assets has been falling because, of course, we have been taking the relevant and the required course corrective actions to focus on products that build profits and also not undertake products that could contribute to asset quality issues in future, right? So we've kind of slowed down given both these lens. But that does have a bearing on the advances yield, because the mix of these products are effectively lower, right? Similarly, let's say, if I look at credit cards, credit card also has seen a reduction in the blended yield, because there was a very significant intervention that we brought in. And that meant also that to some extent, the revolver rates have dropped. Now of course, if you think from a profitability standpoint, we'll have to bring that up. But that has -- some of these -- given the confidence that we now have on building the momentum back in Retail, having addressed some of the past issues, we do believe that the Retail contribution in the advances growth should keep increasing. And that, again, will have a bearing on our margin. And we've said this in the past, a combination of RIDF, continued focus on deposit pricing, and third, which is on the increasing share of Retail or at least increasing contribution in the incremental advances, all of this, we do believe that a 2.5% margin structure should clearly work comfortably upwards of 3%, more closer to a 3.25%, 3.3%. Now I think that's really our endeavor and plan to build the margin. Now of course, is there room for improvement on fees? I mean, we can always argue, yes. I think we are doing well. But yes, 10 basis points of DuPont expansion on fees is possible. I would not guide cost to really come up. I think we should still operate in a 2.5% to 2.6% cost-to-asset structure. And at least for the next year or 2 years, we do believe that the ARC resumptions will play out. Of course, they will be choppy at times, they will be noisy. But I think on the whole, some of those will make sure that our credit cost is comfortably below 50 basis points to assets. And that also gives us a comfortable period to normalize our existing credit cost on assets as well. So I think that's really the pathway. It's more grow, but grow with very sharp profitable focus, and some of these initiatives that we are talking about should play out in the next couple of years. I missed one important point just for abundant clarity, which is that once the RIDF runs down, it's not just the RIDF, but there is also the corresponding borrowings, because we've used, let's say, a large part of the refinance borrowing that is funding the RIDF. So as those start coming down, we should start benefiting from that as well. I think you did ask a question about focus on SMBC over the next 2 years as well. I think I will refer that to Prashant. But fundamentally, the way we look at SMBC's thought process, and of course, this is a question more relevant to them, but we are a bank that complements their India strategy. And therefore, the only question to ask is, from their vantage point, and for us to be asking them is, what can we do together more and better to fast track this journey of growth and ROE expansion? So I think both of us are wanting to keep high aspirations, but we want to make sure that we also adopt some of the better and learn better governance and compliance standards, because they are a global SIB. I'm sure there will be some learning to do, although we do believe we are quite high on risk and compliance culture. And over time, hopefully, at least in the Wholesale space, we do benefit from lower cost of funding as well, as more and more corporates -- we get access to that base as well. So I think that's, sorry, a long-winding answer, but I just thought I'll clarify on all the points.

Great. Just one follow-up. The LCR is down 10 percentage points Q-on-Q, but I did not see any impact on NIM. Is there something technical there? And we should -- because I would have expected a much better outcome on NIM with lower LCR?

So I mean, if you just think about loan spreads, because I think that's really a good metric to keep. The advances yields have actually fallen about 45 basis points, more like 40 to 50 basis points. And if you look at our cost of funding, that's really kind of been at about 20 basis points to 30 basis points of reduction, right? So clearly, the margin shrinkage at a structural level should have been higher. But some of the intervening, I would say, efforts that we kind of keep saying that, okay, how can we be more efficient in balance sheet. So there is some tactical room to look at lowering our LCR. Now that's helped us also contain some of the loan spread shrinkage that we've seen. But now that, let's say, the TD repricing will start kicking in from December more emphatically because a large part of the repricing of the loans has played out, we do believe that we should kind of start looking at comfortable liquidity once again. But the idea is to run a very balanced optimal balance sheet. So some of those calls also played out in Q2.

Our next question comes from the line of Jai Mundhra from ICICI Securities.

I also wanted to check the same thing. So you have also mentioned or you have outlined the key areas where SMBC, you would plan to leverage their expertise in transaction banking, maybe large corporate relationship. But given the fact they have a 100% subsidiary, which does some of the Retail products that we may also be doing, it becomes clear, right, that, I mean, you would want their expertise more on those areas that you have highlighted, transaction banking and large corporate relationships, versus any incremental thing on the Retail side, right? Because that anyway, you have more or less the full bouquet of products and that part will remain as it is, right? Is that understanding correct?

So I think, Jai, what we need to see is about the entire spectrum where we need to work together in terms of value getting added to Yes Bank, okay? Since there is no overlap and it's a complementary structure, I think with this relationship, we would definitely explore in terms of how we can cater to their large corporates. In terms of the transaction banking, providing them the transaction banking services, providing them the executive services, and also offering the Retail liabilities and Retail asset products to their employees. At the same time, these corporates, where the SMBC has a lending arrangement, they also have a supply chain through the various SMEs, which at present SMBC is not able to take care of their requirement. So we would also like to explore how we can service those SMEs who have the supply chain for the corporates. At the same time, we can't also rule out any arrangements from their NBFC side. Because currently, the bank is also in the co-lending space with a number of NBFCs and now RBI has opened up beyond NBFC also. So we will explore that if we can have a co-lending arrangement where we can originate, and we also participate in those kind of lending. So it's an entire spectrum, which is not only confined to the transaction banking of the corporate, but the entire suites on the Corporate as well as on the Retail side.

Sure, sir. And now assuming no further rate action from RBI side, and any which way you have a tailwind of reducing RIDF, so what would be your best guess to achieve 1% ROA and maybe loan growth similar to system levels on an overall book basis?

Jai, I think we have already stated in terms of that 1% ROA by FY '27, okay? And I think we are moving quite nicely on that road map. Coming to your second question in terms of loan growth. I think it's important to understand from where the loan growth is coming for the industry. Instead of just matching a loan growth, we would be focusing more on the profitable loan growth. So I think the large bank who has a clear advantage on the cost of funding, I think they are able to do a profitable business growth on the products like car loans, enterprise, and home loans. And we will see, till the time our funding cost also becomes nearer to them, and we would like to slightly be away from these kind of products. So I would not like to compare in terms of the peer level loan growth. I would like to compare with the peer level product loan growth, especially on the Retail. But definitely on the Wholesale and the Commercial Banking space, we are already in line with the peer level.

Okay, sure. And lastly, sir, if you have any preliminary working on the ECL -- transition to ECL, because we have had certain -- FY '20 was a very -- not so good year. Any preliminary working on how would you transition to ECL? Would that require -- I mean, how do you -- if you can share initial estimates on that front?

So Jai, again, too early to comment, because I think we'll have to go through the draft guidelines quite in detail. But if we look at some of the pro forma trends in the recent times, of course, this has some of our own assumptions in terms of the computation. We don't expect a material hit to the opening results as on the date of transition just from a Stage 1, Stage 2, Stage 3 on the loan book. So we don't expect a material hit in any case from this book. However, we do have -- and this is at this point in time; of course, once we transition, we could have a different position to be reviewed. But at this point in time, we are also sitting on the security receipts book. We will have to, of course, review the allowance of treatment of the benefit that we will have upon restatement of this book in our balance sheet, because currently, there is no carrying value of this book, but we do have, let's say, a reasonable face value and an NAV sitting as part of this book. So if that benefit also comes through, then I would say, at this point in time, I could argue clearly that we will not have any impact. On the contrary, we could also benefit into our results. But that's something we will want to review more closely before giving you a firmer output on this subject.

Jai, does that answer your question?

Yes, yes, that answers. I just wanted one clarification. This 1% ROA for FY '27, is it for exit quarter or for full year?

Jai, the target is for full year.

We have our next question from the line of Pankaj Agrawal from Prudence Investment Advisors.

Sir, my question is related to your Retail Banking operations, where the bank is continuing to lose money. So how do you address that in coming time, in coming quarters, the Retail Banking will make profit?

So Pankaj, I think if you see in terms of the disclosures for the current quarter, the losses on the Retail side, or basically, I would be saying like this is the profit before tax. The losses, which was INR 668 crores at the end of quarter 1, has already come down to INR 358 crores, okay? And if you take out or exclude some provisions, excess provisions more than the regulatory requirement, which has been made on this segment, I think we have already reached the breakeven. And this trajectory, we have seen like absolutely on a continuous upward movement. And you would agree with me, the Retail business was not like a core business of this bank prior to 2020. And we have started building and investing in this business after the reconstruction of the bank. Initial 2 years because of the COVID, it was very, very difficult to juice out the return on that investment. And subsequently, if you see like what happened in terms of credit cycle in 2023, which is again industry-wide, if that has not happened, then again, Retail would be giving us the profit much before what we are talking about. But I think going through all those challenges in terms of what bank has undergone; number two, because of the COVID; number three, because of the credit cycle, which happened; and also a very steep fluctuation in the repo rate. I think if you include all these things and when you need to make a lot of investment in terms of your branches, people in the initial phases, I think what is happening on the Retail side is as per our strategic objectives. And since we have already reached to that breakeven, we are going to see, going forward, Retail would also be contributing to the profitability of the bank.

Our next question comes from the line of [ Dev Jay ] from Hotspot Securities.

Am I audible?

Yes. You're audible, sir. You may proceed.

Sir, my question is regarding the sudden spurt in the amount of provision other than the provision for NPA. I found that around INR 200 crores amount of NPA provision has been created -- more than INR 200 crores as compared to the last quarter end. So can you please share a bit about the details of such increase in the amount of provision?

So Dev Ji, if you look at the provision breakup that we have, the provision for investments where it is a line item, where we have seen the security receipts write-back play out. Now that number for last quarter was about INR 345 crores of provision write-back into the P&L. This quarter, that number is a write-back of INR 233 crores. So that's INR 112 crores of material delta to the Q1 P&L. Provision for standard advances and other line items largely is similar. It's both write-backs of about INR 40 crores, INR 50 crores. And if you look at provision for nonperforming advances, we have seen nonperforming advances sequentially actually be flat at about INR 689 crores now. This is despite last quarter actually having one large corporate write-back. So at a core level, provision for nonperforming advances is actually operating -- or trending better than previous quarter. Now if you are referring to the line item for provision for taxes, because that has gone up by INR 100 crores. That is because last year, in the same quarter, we had an income tax refund that got adjusted in the provision for taxation. And therefore, to that extent, the effective tax rate was sub-20%. And therefore, maybe when you're looking at the cumulative provision line item, that could appear to be higher. But I can assure you that the Q2 FY '26 performance on core NPA provisioning is actually better than what we have seen in Q1 FY '26.

Sir, sorry to interrupt, your line seems to be unclear. Could you please reconnect using a stable network?

My apologies. I will reconnect in the queue.

Our next question comes from the line of Mohit Jain from Tara Capital Partners.

My question is in regard to the discussion that we are having in loan growth only. I understand, sir, now we are talking about the focus on profitable loan growth. In that context, where should we see our FY '26 and FY '27 loan growth? I guess earlier we were targeting somewhere 12% to 15%. So obviously, we'll be having a loan growth plan. So where do we see that? And within that, how do we see the Retail loan growth? Because I guess that has been pretty low at 2.5% Y-o-Y.

So I think what I was explaining in terms of targeting a profitable loan growth and where contribution has started coming from our segment, we try to see to achieve the double-digit loan growth for the bank, okay? And Retail would also start contributing somewhere between 4% to 5% for the entire year.

Understood. So just to reconfirm, you're saying double-digit loan growth with Retail growing somewhere around 4.5%, 5%?

Yes, yes, for the current financial year, yes.

Okay. And next year, obviously, it's early to say, but we are expecting a better growth than this?

Yes, absolutely.

Just to check on that, double-digit loan growth will almost take us near to the system growth. So we are confident of almost at that level?

No, I think if you see the system level growth, it would vary, because we really don't know how the second half would play down for the other banks, okay? Some of the other banks are already much higher than us. And maybe like second half year, they would be able to grow faster. So I'm not saying I'm comparing with anyone, but definitely, we are targeting somewhere around 10%.

So Mohit, if I can just also add, just to drive the point Prashant is making. If you look at our loan book, let me break this into 2 parts. Book that we are quite happy to run it down, and we are consciously not growing. So for example, let's say, in Retail, there are certain products, which we are very consciously saying we don't want to grow, right? And then there is, let's say, the book that we want to grow. Now if I just want to contrast some of the growth rates in the book that we want to grow, let's look at, let's say, the Corporate Banking. And of course, there is a rundown of a historical book, which we were very happy to let it run down. If I exclude that book, the large Corporate Banking book is already growing in the teens. If I look at Commercial Banking, that book is already growing at 20%. Retail, for the right asset quality reasons, we had consciously slowed down. But if you now look at the disbursement growth rate, it is already operating at 19%. Now of course, that will start getting reflected on the book with a lag, because there has been some repayments that will kind of keep playing out, right, in that book. So I think the point we want to drive is, wherever we are clear about growth, and we are targeting those segments, our ability to deliver growth is actually up more than the sector, right? But of course, for reasons that I mentioned, let's say, peculiar to Retail, there will be some pockets of Corporate, which was really the old legacy book, but some of that is already now kind of wound down. So all of that, we do believe that the real growth numbers will start expressing itself more emphatically in about, let's say, 3 to 4 quarters. There will be the -- Retail will not pick up, although disbursements are growing 19%, book will not grow at 19% immediately. But there will be a path towards that over the next 4 to 6 quarters, and I think we will then start delivering growth in teens as well. So I think that's really -- I just wanted to give you that as a bank, as a franchise, we do have the confidence to do better than the industry in areas that we want to grow.

Understood. That's very clear, sir. And sir, just one follow-up on the ROA. So we are targeting 1% ROA for FY '27. Do we have any ROE target for us, or anything that we have -- the management has thought about?

We've not provided a target for that, to be honest, but it's not very tough for you to just compute that.

Got it. And sir, we stick to our security receipt -- the recovery from the security receipt guidance of around INR 1,200 crores for the current year. That is something we expect to maintain?

Yes, we maintain that, yes.

Ladies and gentlemen, we will take that as our last question for today. I would now like to hand the conference over to Mr. Prashant Kumar for closing comments. Over to you, sir.

Again, thank you so much for joining our earnings call. If any questions remain unanswered, please connect with our Investor Relations team, and they would be very happy to respond to you. Again, I wish all of you and your family a very happy and prosperous Dhanteras and Deepavali. Thank you.

Thank you.

Thank you. This brings the conference call to an end. On behalf of Yes Bank, we thank you all for joining us. You may now disconnect your lines.