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Yes Bank registered robust net profit growth of 57.8% yoy and 12.7% qoq to `176cr, well
above our estimates of `138cr on account of substantially higher balance sheet growth
than guided by the bank towards the beginning of the year. Advances grew strongly by
15.6% qoq and 86.3% yoy compared to marginal industry growth of ~0.6% qoq. Deposits
increased by 32.3% sequentially and by 106.6% yoy compared to ~1.6% sequential
industry growth. This led to 95.8% yoy growth in NII, despite a sequential NIM
compression of 10bp due to a higher-than-sector-average 40bp increase in cost of funds.
While we have been conservatively building in higher provisioning expenses for the bank,
keeping in view the sectoral averages, the bank continues to maintain its track record in
asset quality. Gross and net NPA ratios stood at 0.22% (0.23% in 1QFY2011) and 0.06%
(0.04% in 1QFY2011), respectively, implying a provision coverage ratio of 74.7%,
excluding write-offs (81.4% in 1QFY2011).
Corporate and institutional banking accounted for 69.8% of the portfolio, commercial
banking accounted for 19.6% and branch banking accounted for 10.6%. CASA deposits
registered strong growth of 118.9% yoy. However, CASA ratio declined to 10.1% from
10.5% in 1QFY2011. Operating costs increased by 35.9% yoy and 3.7% qoq to `163cr.
The cost-to-income ratio stood at 36.6%, lower than its eight-quarter average of 38.9%.
Restructured advances (excluding NPAs) declined by `11cr sequentially to `69cr. The
bank’s CAR continued to be healthy at 19.4% with Tier-I at 11.0%.
Considering the experience of the past several quarters, the inherent challenges of building a
retail franchise are substantial despite the management’s high pedigree. Moreover, with rising
interest rates, the cost of funds for the bank is expected to rise at a faster rate due to the bank’s
wholesale-based funding mix. That said, notwithstanding medium-term downside risks to RoAs
towards sectoral averages, the bank’s high rate of growth within the wholesale segment is likely
to drive strong earnings growth in the near term. At the CMP, the stock is trading at 2.7x
FY2012E ABV, which is below our target multiple of 2.9x FY2012E ABV for the bank.
Hence, we recommend Accumulate on the stock with a Target Price of `373.
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