YES Bank ended 31 per cent higher on the National Stock Exchange (NSE) at Rs 221, recording its sharpest rally since listing on July 12, 2005, after the private sector bank said the Reserve Bank of India (RBI) found no divergence in asset classification and provisioning done by the lender during financial year 2017-18 (FY18).

The stock had rallied 32 per cent in intra-day deals to Rs 224. The trading volume jumped nearly five-fold, with a combined 284 million equity shares representing 12 per cent of total equity of the bank changing hands on the NSE and BSE on Thursday.

“The RBI assesses compliance by Banks with extant prudential norms on income recognition, asset classification and provisioning (IRACP) as part of its supervisory processes. As part of this process, YES Bank has received the Risk Assessment Report for FY2018. The report observes NIL divergences in the Bank’s asset classification and provisioning from the RBI norms,” the bank said in a regulatory filing on Wednesday after market hours.

Brokerages bullish

Analysts maintain a positive view on the stock, especially the post the recent development. Nilanjan Karfa and Harshit Toshniwal of Jefferies, for instance, maintain a ‘buy’ rating on the stock with a price target of Rs 275 – up nearly 25 per cent from the current levels.

“We had thought the RBI’s refusal to allow the reappointment of Rana Kapoor as the chief executive officer of YES Bank was a black swan event – indeed, the stock corrected by around 30 per cent after the news. However, with the RBI’s audit report now citing ‘nil’ NPL divergence, we seem to have mistaken a mere crow for a swan. As noted in our earlier report, we now await the bank’s new strategy, if any, as the risk audit report has made the balance sheet pristine,” they wrote in a recent report.

Adding: “We had not been factoring in any particular NPL divergence number into our estimates. A number higher than last year’s would have worried us, but a ‘nil’ divergence comes as a shock. We think that with a clean audit report, the bank will be able to approach the capital markets to replenish its CET 1 ratio and return to the original growth model. We will wait to see whether Mr. Kapoor seeks a non-executive board seat, which does not require RBI approval.”

Analysts at SBICAP Securities, too, believe this ‘clean chit’ also marks a significant milestone in YES Bank’s efforts at regaining regulatory credibility and confidence. With the key uncertainties now addressed, the brokerage firm expects gradual normalisation of operating performance and consequent valuation multiples.

“Moreover, as visibility improves on growth capital (likely to be the foremost priority hereon), we expect the narrative to quickly move towards a bull-case scenario multiple (based on FY21 numbers). At this stage, we maintain our base-case forecasts and recommend ‘buy’ with target price of Rs 315 (2.5x FY20 P/BV),” says the SBICAP Securities report.

Thus far in calendar year 2019 (CY19), YES Bank has underperfomed the markets by falling nearly 7 per cent (till February 13). In comparison, the Nifty 50 has slipped 0.6 per cent and the Nifty Bank index has lost 1 per cent. Axis Bank, HDFC Bank, IDFC First Bank outperformed and gained 1 per cent to 13 per cent duing this period, ACE Equity data show.

“The regulator’s communication that NPL divergences have been addressed, also indicate a streamlining of processes at the bank and the regulator’s comfort with the change. We now believe risk-reward on the name is highly favourable (trading at 1x FY21E adj. P/BV) and would advise investors to buy even on sharply positive reaction on the stock,” said analysts at JM Financial.