Yes Bank shares rise as Q2 profit beats estimates, but AT1 bond verdict hit pegged at Rs 5,217 crore. What lies ahead?

ETMarkets.com

A legal setback over AT1 bonds has put Yes Bank’s reported quarterly profit under scrutiny.

The Mumbai-based lender would have reported a quarterly loss of Rs 5,217 crore if the impact of the Supreme Court’s ruling was recognised in the earnings print, the bank said in a regulatory filing. This came after the Supreme Court on Thursday upheld a 2023 Bombay High Court judgment that set aside the write-off, dismissing appeals filed by Yes Bank, the Reserve Bank of India (RBI) and the central government, triggering a sharp selloff in the stock. The bank said the reported figures were indicative and subject to revision as it assessed the implications of the ruling.

Also read | YES Bank Q2 profit rises 65%; AT1 hit may risk 5,217 cr loss

Yes Bank’s net interest income (NII), which represents the difference between interest earned on loans and interest paid on deposits, rose 22.7% year on year to Rs 2,822 crore. Advances grew 23.7% from a year earlier, while deposits increased 19.5%. Provisions for bad loans and other contingencies fell 24.2% to Rs 317 crore.

Other income rose 14.4% to Rs 1,882 crore. The private lender’s asset quality also improved during the quarter. The gross non-performing asset (NPA) ratio stood at 1.2% at the end of September, compared with 1.3% at the end of June.

Yes Bank’s earnings announcement on Saturday came after the AT1 ruling. The dispute dates back to March 2020, when Yes Bank was placed under a moratorium by the RBI following a sharp deterioration in its financial position, mounting bad loans and concerns over governance. The central bank subsequently introduced a reconstruction scheme, under which State Bank of India and several other lenders invested capital to rescue the struggling bank.

As part of the restructuring, Yes Bank permanently wrote down AT-1 bonds worth Rs 8,415 crore to zero. The amount comprised Rs 3,000 crore raised in December 2016 and another Rs 5,415 crore raised in October 2017.

AT-1 bonds are perpetual debt instruments issued by banks to strengthen their capital base. They typically offer higher interest rates than conventional bonds but carry greater risks, including the possibility of investors losing their entire investment if specified regulatory triggers are activated.

In January 2023, the Bombay High Court set aside the write-off, finding that the bank's administrator lacked the necessary authority to extinguish the bonds under the circumstances of the reconstruction. The final reconstruction scheme had also omitted an explicit provision for writing down AT-1 bonds.

Also read | Yes Bank Q2 profit beats estimates, but Supreme Court's AT1 bond ruling impact not booked as lender weighs further appeal

Should you buy Yes Bank shares?

Morgan Stanley maintained its ‘Underweight’ rating on Yes Bank shares with a target price of Rs 17 apiece, implying around 3% downside from the stock’s previous closing price of Rs 17.5 apiece on NSE.

Yes Bank shares increased more than 1% to Rs 17.73 apiece on NSE on Monday morning. This came after a sharp 17% plunge over the past two sessions.