Visit http://indiaer.blogspot.com/ for complete details YES BANK 2QFY11: Above estimate; Strong loan growth; Margins at 3%; 10-13% earnings upgrade; Buy
Yes Bank (YES IN, Mkt Cap US$2.6b, CMP Rs352, Buy) PAT grew 58% YoY to Rs1.76b (vs est of Rs1.6b) driven by strong NII growth of 78% YoY (14% higher than est) and controlled operating expenses. Margins declined just 10bp QoQ despite sharp rise in cost of funds by 40bp QoQ. Loans grew 86% YoY and 16% QoQ.
Key highlights:
- NIM declined 10bp QoQ to 3% as cost of funds increased to 6.7% in 2QFY11 vs 6.3% in 1QFY11. Higher yield on investments and elevated CD ratio at 80%+ during the quarter helped to arrest margin decline despite stable yield on loans.
- CASA deposits grew 119% YoY (27.6% QoQ) to Rs40.5b; however, strong growth in overall deposits led to 40bp QoQ decline in CASA ratio to 10.1%.
- Non interest income declined 3% YoY and 9% QoQ, due to lower income from financial market segment (had Rs150-250m loss on investments). Fees from transaction banking grew 12% QoQ but grew only 8% YoY (a disappointment). Fee from financial advisory fell 16% QoQ (on a higher base) to Rs637m (up 13% YoY).
- Asset quality was stable with GNPA ratio at 22bp and Net NPA ratio at 6bp. PCR stood at 75% v/s 81% in 1QFY11 (provision including specific provision at 299% vs 310% a quarter ago).
- Despite adding 18 branches during the quarter, cost to income ratio improved sequentially to 36.6% in 2QFY11 vs 38.7% a quarter ago on back of controlled opex and strong NII growth. However with ramp up in branch expansion, management expects C/I to increase.
Strong growth in balance sheet continues
- In 2QFY11, loans grew 86% YoY and 16% QoQ (on a higher base, 1QFY11 loans grew 18% QoQ). Growth in the quarter was driven by strong pick-up in infrastructure, food and agriculture and engineering segments.
- Management expects loan growth to moderate in 2HFY11, given repayments of short tenure loans and base impact; however, it remains confident of growing its loan book by 50%+ in FY11. We model in loan growth of 55% in FY11.
- Wholesale and commercial banking (90% of loan book) will remain a key growth driver in near term; over medium to long term, bank intends to increase share of Retail and SME loans to ~30% (~5-6% currently) as branch expansion gathers pace.
- Deposits growth during the quarter was robust at 32% QoQ and ~107% YoY. Even though CASA growth remained strong at 27.6% QoQ, CASA ratio declined 40bp to 10.1%. Management targets to improve CASA ratio by 200-300bp every year and expects strong growth trajectory in CASA deposits to continue with branch expansion and focus on retail deposits. It plans to open 25-30 branches every quarter.
Valuation and view
- We have upgraded our earnings estimate by 13% for FY11 and 10% for FY12 to factor in strong loans growth and lower credit cost. We model in loans growth of 55% in FY11 vs 45% earlier and maintain our estimate of 35% growth for FY12.
- Return ratios will be strong at 1.4-1.5% over FY10-12 and RoE is expected to be superior at 20%+ over FY10-12.
- We expect Yes Bank to report EPS of Rs22 and Rs28 in FY11 and FY12. BV will be Rs110 and Rs135. Stock trades at PE of 13x FY12 and PBV of 2.6x FY12.
- Over FY05-10, average PBV one year forward multiple stood at 2.6x and PE stood at 17x and Peak PBV stood at 4.8x and PE stood at 30x. While Yes Bank is trading at close to average multiples, peers (HDFC Bank, Axis bank and ICICI Bank) are trading at premium of 15-20% to their 5-yr average multiples.
- While reported CAR stood at 19.4%, Tier I ratio is at 11% (came down from 12.9% as of FY10). We expect bank to raise capital in next 12 months on back of strong loan growth. However, this is not factored in our earning estimates.
- Strong growth, proven execution capabilities, diversified fee income and superior return ratios will ensure premium valuations to prevail. We revise our target price to Rs405 (3x PBV FY12E). Maintain Buy.
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