Yes Bank Ltd Upgrade to Buy post strong 2Q:: BoA ML

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􀂄 Upgrade to Buy on very strong growth momentum
We are upgrading Yes Bank to Buy (from Neutral) post its 2QFY11 earnings that
came in +20% ahead of our estimates, driven by top-line growth. We believe Yes
Bank can sustain high profit growth of +50/30% through FY11/12, amongst the
highest in the sector, as it scales up distribution. RoEs could expand to ~23% by
FY12 – and may sustain at +20%, even if it were to raise fresh capital. Hence, we
believe that the stock can trade up to a ~15x PE for a CAGR earnings growth of
+30% through FY11/12. On P/B, it can trade up to 3.2x FY12 book. The stock has
U/p markets by ~10% YTD. Our PO moves up to Rs425; +20% upside potential.
+75% yoy surge in top line drives 2QFY11 earnings

Yes Bank’s 2QFY11 earnings, at Rs1.8bn, were up 58% yoy (+15% ahead),
owing to a 78% surge in its top line (Net interest income). Top-line growth was
driven by strong +85% loan growth and steady margins at 3.0%. Fee growth was
the disappointment, growing by only 15%. Tier 1 stands at 11%. Finally, its credit
costs also fell, as NPL formation was much lower than expected. Asset quality
remains manageable, with gross at 0.2% and net at <0.1%, and coverage at 75%.

Raise earnings by 8/14% for FY11/12
We are raising our earnings by 8/14% for FY11/12 to capture the substantially
higher volumes, lower credit costs and improving C-I ratio. Rising distribution (250
branches by Jun’11 from 171 now) should also aid growth / CASA. RoE could rise
to +23%. Tier I may, however, fall to ~7.5% (and lower if growth is >40%). We
estimate earnings growth of +30% to sustain through FY12.