Yes Bank Ltd Business growth beat expectations: Religare Research

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Yes Bank Ltd
Business growth beat expectations
Yes Bank’s (YESB) Q2FY11 results beat our as well as consensus estimates with a
NII growth of 78% YoY (19% QoQ). This was driven by a robust credit growth
of 86% YoY (16% QoQ), primarily led by the infrastructure and food & agri
segments. Other income, however, declined YoY and QoQ due to lower trading
gains and a relatively muted growth in fee income. NIMs declined ~10bps QoQ
to 3% on a lower incremental C/D ratio (just 42% in Q2FY11) and a drop in
yield on advances. Asset quality remained healthy with gross NPA/net NPA at
0.22%/0.06%. Tier I ratio contracted 190bps from March ’10 levels to 11%
despite Rs 2.2bn raised through IPDI bonds in H1FY11.
We are upgrading our earnings estimates by 6.7/3.6% for FY11/ FY12 to factor
in the higher-than-expected growth in advances, and are raising our target price
to Rs 380/sh. While business growth would continue to grow significantly above
industry rates, a weak liability profile (given the lower CASA) would weigh on
the stock’s performance in the long term. Maintain HOLD.
Strong advance growth, but liability profile remains weak: A strong credit growth
of 16% QoQ was supported by infrastructure and food & agri segments (up 39%
and 40% respectively, Fig 4). However, the bank’s liability franchise remains
weak with a CASA ratio of just 10%. Overall C/D ratio declined from 87% in
Q1FY11 to 76% due to the management’s sharpened focus on deposit
mobilisation (up 32% QoQ). NIMs also dropped 10bps QoQ due to lower
incremental C/D ratio and a decline in yield on advances.
Fee income growth under pressure; C/I ratio at 37%: YESB’s other income
declined 3% YoY and 9% QoQ (Fig 5) on account of MTM losses. As per the
management, the company incurred a MTM loss of ~Rs 150-200mn on its bond
portfolio and a muted fee income (CEB) growth of 15% YoY (down 4% QoQ) on
account of lower financial advisory income (Fig 5). Fee income growth will likely
remain under pressure in H2 as regulatory changes impact distribution of third
party products. Operating expenses rose 36% YoY on account of a 41% YoY
increase in employee costs. C/I ratio was maintained at 37%.
Asset quality remains healthy: GNPA/NNPA remained largely stable at 0.2%
/0.1% (Fig 6). Specific provisioning coverage stood at 74.7% and overall
provisioning coverage at 299%. Restructured accounts dropped to Rs 690mn in
Q2FY11 and stood at just 0.2% of gross advances.
Strong growth could lead to equity dilution in FY12: Tier I capital was 11% at
Q2FY11-end (down 190bps YTD despite Rs 2.2bn raised through IPDI bonds in
H1). Considering the strong growth in advances, we believe that the bank could
raise capital in FY12; however, we are currently not factoring this in our numbers.