Yes Bank faces capital and growth uncertainty after AT1 bond ruling

Investment View and Recommendation

ICICI Securities’ October 19, 2026 results update maintains a HOLD recommendation on Yes Bank and lowers the target price to Rs 17 per share from Rs 24. The broker views Q2FY27 performance as stable and in line with expectations, but believes the adverse Supreme Court ruling on the AT1 bond write-down has created uncertainty around the bank’s capital position, growth trajectory and risk appetite.

Q2FY27 Financial Performance

Yes Bank reported Q2FY27 profit after tax of Rs 10.8 billion, up 1 per cent sequentially and 65 per cent year on year. Net interest income rose 1 per cent sequentially and 23 per cent year on year to Rs 28.2 billion. Pre-provision operating profit was broadly flat sequentially and increased 29 per cent year on year, while return on assets was unchanged at 0.9 per cent.

Loan and Deposit Growth

Loan growth was supported by FCNR funding and an 8 per cent sequential increase in commercial banking loans, while corporate loans were flat sequentially. Deposits increased 12 per cent sequentially, led by Rs 186 billion of FCNR deposits. CASA deposits grew 3 per cent sequentially, although the CASA share declined to 30 per cent from 32.7 per cent in Q1FY27.

Margins, Fees and Operating Costs

Net interest margin declined 10 basis points sequentially to 2.60 per cent. Yields on advances fell 20 basis points, while the cost of deposits increased 10 basis points. Management expects margins to remain stable sequentially and improve in Q4FY27, supported by repo-rate tailwinds and a reduction in the RIDF book.

The RIDF book stood at Rs 258 billion, or 5 per cent of assets, and is expected to decline further in H2FY27. The liquidity coverage ratio was 131 per cent. Core fee income grew reasonably, although treasury and foreign-exchange income was muted. Operating expenses rose 5 per cent sequentially and 14 per cent year on year.

Asset Quality and Credit Costs

Asset quality remained broadly stable in Q2FY27. Gross NPA fell to 1.2 per cent and net NPA remained at 0.2 per cent, while provision coverage was 80.5 per cent. SMA 1 plus 2 loans were stable at 0.9 per cent. Recoveries from stressed receivables were Rs 3.95 billion and credit cost was about 30 basis points.

Retail slippages remained elevated at around Rs 8.4 billion to Rs 9 billion for the past two to three quarters. ICICI Securities considers this a slower improvement than that seen among peers. The broker estimates benign credit costs of about 0.4 per cent for FY27E and FY28E. Management has guided for an expected-current-credit-loss transition impact of 50 to 60 basis points of capital.

AT1 Bond Ruling and Capital Position

The Supreme Court upheld the Bombay High Court judgment concerning the Rs 84.15 billion AT1 bond write-down. Yes Bank had not completed its assessment at the time of the report. ICICI Securities estimates that Q2FY27 pro forma CET1 would decline by about 270 basis points to 11.4 per cent.

The broker notes that the ruling does not entail a cash outflow or affect current operations. However, it could constrain growth and risk appetite and accelerate a capital raise. ICICI Securities does not incorporate the potential Rs 2 per share AT1 impact in its estimates because of limited clarity.

Forecasts, Risks and Valuation

ICICI Securities has cut its FY27 growth estimate to about 9 per cent and reduced its FY27E and FY28E EPS estimates by 3 per cent and 2 per cent, respectively. The Rs 17 target price is based on about 0.9 times FY28E adjusted book value, compared with about 1.2 times previously. On pro forma FY28E adjusted book value, the target multiple is about 1 time.

The broker sees potential upside from stronger fee income driven by merchant discount rate on UPI, for which Yes Bank could be a larger beneficiary. However, the benefit depends on competitive dynamics. The main downside risk is slower resolution of the AT1 issue.