If I buy Yes Bank Shares Today, can I expect a 500% Return in the next 3 Years
I saw this question on Quora and thought to answer this question as a short blog post. To address this question, let’s dive into a detailed analysis of Yes Bank’s business and fundamentals, considering various aspects that could impact its stock performance.Current StateYes Bank has faced significant challenges in recent years, including governance issues, asset quality concerns, and liquidity crises. However, under the new management led by CEO Prashant Kumar, the bank has been working to address these issues and stabilize its operations.Under the guidance of CEO Prashant Kumar, Yes Bank has made significant strides in strengthening its governance structure and risk management practices. The bank has implemented various measures to enhance transparency, accountability, and oversight. It is thereby restoring investor confidence gradually.Furthermore, Yes Bank has taken decisive steps to improve its asset quality by recognizing and providing for stressed assets. It has been augmenting its provisions for potential losses thereby reducing its Net NPA’s.Yes Bank has also focused on revitalizing its business growth while maintaining a cautious approach to risk. The bank has launched several initiatives to enhance customer experience, expand its digital offerings, and diversify its loan portfolio. With a renewed emphasis on prudence and sustainability, Yes Bank is poised to emerge from its recent challenges.Positive FactorsImproved Governance: The bank has strengthened its board and management. Now it aligns with regulatory requirements and best practices.Asset Quality: Yes Bank has made progress in reducing its stressed assets and improving provisioning coverage. As on Mar’20, its NNPA was 5% compares to Mar’24 of 0.6%.Liquidity: The bank has enhanced its liquidity profile, with a comfortable liquidity coverage ratio.Digital Transformation: Yes Bank has been investing in digital initiatives. This way it has enhanced the customer experience and operational efficiency.Government Support: Yes Bank received a bailout package from the government and the State Bank of India (SBI) in 2020 (probably the bank was too big to fail). It provided the bank its lifeline during a critical period.Challenges and ConcernsAsset Quality Risks: Yes Bank still has a higher proportion of stressed assets compared to peers. It poses risks to its profitability going forward. As of today, NNPA of Axis Bank is 0.31% compared to 0.6% for Yes Bank.Competition: The Indian banking sector is highly competitive. We’ve established players and new entrants vying for market share.Regulatory Scrutiny: Yes Bank remains under regulatory watch. Any missteps could impact its reputation and stock performance further.Economic Uncertainty: India’s economic growth and banking sector performance are susceptible to global and domestic economic uncertainties. Like, what happened in USA in 2008 debt crisis also had serious effects on Indian banks.Growth ProspectsRetail Banking: Yes Bank has been focusing on expanding its retail banking franchise. Such an exposure offers higher margins and stability.Digital Banking: The bank’s digital initiatives can drive growth in transaction banking, payments, and other fee-based services.Corporate Banking: Yes Bank has a strong corporate banking franchise. It can benefit from India’s economic growth and infrastructure development. But exposure to corporates also have its own risks.ValuationYes Bank’s current valuation multiples are:Price-to-Book (P/B) ratio: around 1.8Price-to-Earnings (P/E) ratio: around 53BanksPriceMCap(Cr)TTM PEP/BYes Bank24.0275,288.3652.221.8HDFC Bank1,636.6012,46,987.5018.292.75ICICI Bank1,221.808,60,491.5718.563.19Axis Bank1,171.403,62,189.7313.552.32Kotak Mahindra1,798.003,57,463.9816.622.75The P/E multiples is relatively low compared to peers, indicating potential upside if the bank delivers on its growth plans and improves its fundamentals. But the P/E ratio is very high. Generally, P/E ratio of private bank stocks in India trades within the range of 16 and 20. The P/E of Yes Bank is too high indicating that the current price levels at Rs.24 may not be sustainable.Return ExpectationsConsidering the above factors, a 500% return in the next 3 years is very ambitious and challenging. 500% Absolute returns means the stock must grow by 6 times (reaching price levels of Rs.145 at 80% per annum CAGR). I think, in the next 3 years, Yes Bank shares cannot grow so fast.My estimate is that, in the next 3 years, if Yes Bank can follow the below guidelines, it can reach the price band of Rs.45-50 per share. Even to reach this level it will have to grow at a rate of 25% CAGR.To achieve this return, Yes Bank would need to:Sustainably improve its asset quality, with a significant reduction in stressed assets.Demonstrate strong revenue growth, driven by retail and digital banking expansion.Enhance its profitability, with improved margins and cost efficiency.Maintain a stable liquidity profile and robust governance practices.If Yes Bank delivers on these aspects, its stock price could potentially double in the next 3 years.But to reach that levels, it will need re-ratings of its valuation multiples and earnings growth.ConclusionWhile Yes Bank has made significant progress in addressing its challenges and stabilizing its operations, a 500% return in the next 3 years is highly ambitious and unlikely.The bank still faces risks related to asset quality, competition, regulatory scrutiny, and economic uncertainty. However, with a renewed focus on prudence, sustainability, and growth, Yes Bank has the potential to deliver a more modest yet respectable return.Achieving a price target of Rs.45-50 per share in the next 3 years, representing a 25% CAGR, is a more realistic expectation.This would require the bank to sustainably improve its asset quality, drive strong revenue growth, enhance profitability, and maintain stable liquidity and governance practices.If Yes Bank delivers on these aspects, it could potentially double its stock price in the next 3 years, making it a worthwhile investment opportunity for those with a medium-term perspective.Suggested Reading:
