'Lack strong moat': 4 reasons why YES Bank shares got 'Sell' from Goldman Sachs

Goldman Sachs, which has a target of Rs 16 on YES Bank Ltd, said the private lender’s fundamentals have been under pressure due to subdued margin profile and a bottoming of credit cost improvements, which may lead to a low return on asset (ROA) of 0.3 per cent in FY24. The foreign brokerage sees the prevailing valuations rich and, thus, downgraded its rating on the bank to 'Sell' from 'Neutral'.

While YES Bank has come a long way in repairing its balance sheet including non performing loan (NPL) improvement as well as better liquidity management, Goldman Sachs believes the lender lacks a strong moat and its profitability faces four challenges in terms of cost of funds, retail base, distribution capacity and bottoming out of credit cost.

Goldman Sachs said cost of funds should improve over time as the bank builds its CASA profile and/or any significant improvement in liquidity. It noted that the competitive intensity is significant in the retail asset and therefore scope of raising yields is rather limited. Goldman Sachs said YES Bank needs to build up distribution capacity and that is likely to keep cost-to-income ratio elevated. Besides, it said credit costs bottoming out has by-and-large already played out and the slippages ratio are normalising upwards.

"On balance, we still expect ROA to improve from a low of 0.25 per cent in 3QFY24 to 0.8 per cent inFY26E, mainly on our expectation of the bank improving margins and improvement in operating leverage over the next two years. Having said that, it is much lower than our previous expectations of 1.1 per cent ROA by FY26, and we believe its ROEs are going to remain sub-par despite improvements due to the above mentioned challenges and hence the current valuations appear rich," it said.

Goldman Sachs has cut its earnings per share (EPS) estimate for YES Bank by 43 per cent in FY25 and book value per share (BVPS) by 6.6 per cent but maintain its Rs 12-month target price at Rs 16, implying 40 per cent downside. This is against an average 21 per cent upside for Buy-rated names in its coverage stocks.

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