Yes Bank Q2 preview: Will strong profit, NII growth offer relief for investors amid AT-1 bond saga?

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The stock has lost nearly a fifth of its value at its lows over the past two trading sessions after the apex court on Thursday upheld a Bombay High Court judgment setting aside the controversial write-off undertaken during Yes Bank's reconstruction in March 2020.

The ruling has raised concerns about the potential impact on the bank's capital position and future profitability, overshadowing expectations of an improvement in its core banking performance.

According to the average of six brokerage estimates, Yes Bank's net profit is likely to rise 48% YoY to around Rs 969 crore in the July-September quarter, compared with Rs 655 crore in the corresponding period last year. Net interest income (NII), the difference between interest earned and interest paid, is expected to grow 22% to around Rs 2,807 crore from Rs 2,301 crore a year earlier.

Brokerage estimates, however, show a considerable variation in profit expectations, reflecting differences in assumptions on operating expenses, margins and provisioning.

ICICI Securities expects Yes Bank's net profit to jump 64% YoY to Rs 1,074 crore, while NII is estimated to increase 22.5% to Rs 2,820 crore. JM Financial has a more conservative profit forecast, projecting a 37.4% YoY increase to Rs 900 crore. Its NII estimate stands at Rs 2,818 crore, representing growth of 22.5%.

JM expects net profit to decline 16% sequentially, while ICICI Securities forecasts a marginal 0.2% quarter-on-quarter increase.

The two brokerages also differ on operating profit. ICICI Securities expects pre-provision operating profit to grow 33.5% YoY to Rs 1,731 crore, while JM Financial projects a 22.1% increase to Rs 1,583 crore.

Loan growth, margins in focus

Analysts expect healthy loan growth and an expanding deposit base to support Yes Bank's interest income during the quarter, although the cost of funds could weigh on margins.

Kotak Equities expects NII to grow 23% YoY, supported by loan growth of around 25%, partly aided by the bank's foreign currency non-resident (FCNR) deposit scheme. The brokerage expects deposit growth of 20% YoY, helped by FCNR inflows.

"We expect 23% yoy NII growth with healthy loan growth (~25% yoy) partly due to leverage of the FCNR scheme," Kotak said in its earnings preview.

The brokerage sees net interest margin (NIM) to be around 2.7%, with a marginal sequential decline of about 10 basis points. It attributed the expected pressure partly to the cost of FCNR deposits and normal fluctuations in income from recoveries and other items.

ICICI Securities is pencilling NIM at 2.66%, down four basis points sequentially but 16 basis points higher than a year earlier.

It estimates advances to increase 19% YoY to nearly Rs 2.98 lakh crore, with sequential growth of 4.4%.

Investors will also watch the bank's ability to improve profitability through a more favourable loan mix, higher interest income and better cost efficiency as management focuses on rebuilding the business.

Asset quality and slippages

Asset quality will be another important factor in the September-quarter results, with analysts expecting recoveries and upgrades to support the bank's performance.

Kotak said steady traction in recoveries and upgrades from Yes Bank's retail portfolio is likely. It has pencilled in fresh slippages of about Rs 1,200 crore, equivalent to an annualised 1.7% of loans.

"Earnings impact is difficult to forecast given the nature of provisioning policy. Focus is shifting towards rebuilding the business," Kotak said.

ICICI Securities expects slippages to fall 24% YoY to Rs 950 crore, compared with Rs 1,248 crore in the year-ago quarter. On a sequential basis, slippages are expected to decline 1.5%. Lower slippages and improving recoveries could support earnings, although the extent of provisioning will be crucial in determining the bank's bottom line.

Disclosure: This article has been written by Podishetti Akash, who is not a SEBI-registered Research Analyst or an Investment Adviser. Podishetti Akash and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclosures here.