UBS Cuts Yes Bank’s Rating Prompting Biggest Drop in 17 Months

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Yes Bank Ltd., last year’s best-performing Indian bank stock, tumbled the most in 17 months after UBS Group AG recommended selling the shares on concerns the lender’s asset quality will deteriorate.

The stock fell 7.5 percent to 797.50 rupees on Wednesday in Mumbai, paring gains this year to 3.3 percent, compared with a 0.7 percent advance in the benchmark S&P BSE Sensex. Yes Bank was the worst performer on the 10-member S&P BSE India Bankex Index, which lost 1.7 percent on Wednesday.

“We believe Yes is most vulnerable to a prolonged weak credit cycle and consensus may not be ready for a sharp increase in the company’s credit costs,” UBS analysts led by Vishal Goyal said in a July 7 note to clients. It cut the price target to 740 rupees from 1,000 rupees.

Loans approved by the Mumbai-based bank, led by Chief Executive Officer Rana Kapoor, to so-called potentially stressed companies tripled in the three years to March 31, according to UBS. These loans could sour because of risks arising from a gradual economic recovery and continued stress in sectors such as steel, power and construction, Goyal wrote.

Yes Bank “strongly refuted” the contents of UBS’ research report, which “has exaggerated the exposures,” the lender said in an e-mail.

“The bank has demonstrated exceptional credit quality outcomes over the past five years despite the challenges in the Indian economy,” the e-mail said. “With the recovering economic cycle, we will grow our business by 25%-27% per annum over the next five years.”

Gross bad loans as a proportion of the bank’s total stood at 0.4 percent as of March 31, an exchange filing showed. Loans grew 36 percent in the year to March, according to the filing.