JPMorgan has cut its target price on Yes Bank by around 38% to Rs 13.10 per share from Rs 21 earlier, maintaining its Underweight rating on the stock, following the Supreme Court judgment that overturned the bank's decision to write off Additional Tier-1 (AT-1) bonds worth Rs 8,415 crore.
The global brokerage said the judgment could have a material impact on Yes Bank's capital position and earnings, with further downside risks if coupon payments on the reinstated AT-1 bonds are revived.
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JPMorgan has incorporated the reinstatement of the bonds into its estimates but assumed that the bank will not be required to pay accrued interest to bondholders. It has also assumed that Yes Bank will retain the discretion to withhold future coupon payments under the terms of the information memorandum.
Under these assumptions, the brokerage estimates an adverse impact of Rs 1,820 crore on the bank's FY27 profit and loss account, alongside a decline of around 240 basis points in its Common Equity Tier-1 (CET-1) capital ratio to approximately 11.4%.
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JPMorgan has consequently cut its FY27, FY28 and FY29 earnings estimates by 136.3%, 7.7% and 19.7%, respectively.
The brokerage warned that a revival of annual coupon payments of around Rs 770 crore could result in an additional 10-11% hit to FY28 and FY29 earnings. This could also put pressure on the bank's capital position and restrict its growth prospects.
JPMorgan also flagged risks from a potential reduction in insurance commission income, adding to the pressure on earnings.
While Yes Bank's operating performance has improved, with second-quarter FY27 profit rising 65% year-on-year to Rs 1,080 crore, JPMorgan believes structural challenges persist. The brokerage highlighted relatively weak return on equity, slower growth and a lagging liability franchise.
It also cautioned that the implementation of expected credit loss (ECL) norms in FY28 could further affect the bank's capital buffer.
Although Yes Bank's valuation at around 0.87 times FY28 estimated price-to-book may appear attractive, JPMorgan sees limited scope for a re-rating amid the earnings risks. A potential additional equity investment from SMBC remains a key upside trigger.
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