Yes Bank market cap has fallen down by Rs 10,358 crore in the last one month

It is very hard to find a good private banks to invest when market is trading close to all time high and many stocks close to their 52 week highs. Yes bank had lost Rs 10,000 crore value from its market cap on the news of understating their NPA’s for the 2016 financial year.

This understatement of NPA issue is very sensitive in the minds of investors. Today, the countries GNPA stand well above Rs 700,000 crore and they are creeping up at a speed of almost 10% every year. The government has given RBI a special power through Bank Ordinance Act to solve this issue. This is a good news as this NPA issue is like hangover on banks from the past 3 years. As banking sector is standing on edge, any bad news on this front, stocks get beaten down badly.

It looks the same thing happened with the Yes Bank last month. Did investors overreacted and pulled down Yes Bank stock price from Rs 1,650 to around Rs 1,400? Or is there something else that is pulling its stock price further down.

GNPA issue

The whole understated NPA episode value was of around Rs 4,100 crore and management came out and cleared that on the result day itself that as of 31st March 2017, Rs 911 crore were added to its GNPA as per RBI guidelines about understated GNPA for 2016 financial year.

As an investor the first question comes to my mind is, is banking sector well-regulated in India? So that if this mistake was done unwittingly should not be repeated again.

RBI in its role as a central bank is well reputed in the world. It is highly regulated and they have all the resources and tools to catch any wrong doing by any banks. Yes bank also have very tight corporate governance practice and I am sure they will learn from this episode and act prudently in the future.

Valuations

So the noise of this GNPA should calm down and not impact much to the value of this business. We valued this business on its 2017 performance for Rs 956 per share. To add more value to it, Yes bank will have to keep functioning as business in usual and grow its profitability and book value.

If I look at the expectation reports of all the analysts who follow this business, I can easily break them into two teams. One which is optimistic and bullish about Yes Bank business and expects its profits for 2018 to rise as high as Rs 4,700 crore. Another group of pessimistic analysts who expects its profits to fall down as low as Rs 3,000 crore for the 2018 financial year.

The future is unknown and no one can predict that accurately. So whom should you believe? Both the scenarios have potential to change into reality. The market also expects a very healthy earnings growth from Yes Bank for 2018 and 19 financial year.

We are long term investors and do not mind holding businesses for 10 years as long as they tick our box of keep adding value every year at healthy rates and maintain its quality. Apart from big 4 private banks, Yes Bank comes to our mind where it has a good potential to turn into number 5 private bank of India.

If we consider the above expected profits to be real than according to our calculations Yes Bank stock price is trading at premium of 25% to its upper band of expected intrinsic value for 2018. This gives me another reason why the stock price of Yes Bank is facing pressure to lift back to the Rs 1,600 levels. Most of the private banks are trading well above their 2018 valuations and Yes Bank stock price at Rs 1,600 levels was looking very expensive compare to its peers.

But the good news for long term investors is that its current stock price is still trading within its 2019 valuation band. Our stock allocation meter is telling us that you can invest up to 30% of your stock allocation in this business at today’s price. Which means if you are planning to invest Rs 100,000 in Yes Bank, than it is worth to invest Rs 30,000 at today’s market price and wait for more weakness in its price to raise your investments.

We advise investors to buy stocks when they are trading within the valuation bands or below their valuation bands. We also prefer not to look more than 2 years ahead valuation bands for investments. A quick disclosure over here that we own few Yes Bank shares in our portfolio.