Yes Bank OW(V): 2QFY11 – Playing the Upcycle:: HSBC research

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Yes Bank
OW(V): 2QFY11 – Playing the Upcycle
 YES’ biggest surprise was at the net interest income level
led mainly by higher balance sheet growth
 Potential sources of surprise in the current upcycle are likely
to be loan growth and lower provisions
 Retain OW(V), raise target price to INR534 from INR402,
implying a total potential return of 52%


2QFY11 earnings grew 58% y/y and the 13% upside surprise was led by higher than
expected loan and deposit growth. The stock outperformed both the Bankex and Sensex.
Key themes: Loan growth of 86% came almost equally from the large corporate and SME
+ priority sector books and was more than adequately funded by the deposit base doubling
y/y. While margins temporarily receded 10bps, we expect a catch up of recently-raised
lending rates to help support margins going ahead.

Operational review: Despite robust net interest income growth, fee income grew lower
than expected at 36% (ex-treasury profits) dragged by transaction banking related fees,
which we believe is a temporary occurrence and should correct going forward. Despite 18
new branches added this quarter, the cost income ratio has not increased. Gross NPL ratio
reduced and specific coverage was maintained at 75%, while total coverage was above
300% as reported by the Bank.

Earnings outlook: We broadly maintain our existing estimates looking for 38% CAGR
through FY13E driven by 44% CAGR loan growth and firm margins. However, we do
expect a slightly lower ROA at 1.37% by FY13E vs. 1.44% expected earlier. Accordingly,
we fine tune our target multiples by 10% to 18x PE and 2.5x PB vs. the stock currently
trading at 15x PE and 2.9x PB on a 12-month forward basis.

Valuations and target price: We continue to value Yes Bank using a weighted average
combination of PE, PB, and economic profit model (EPM) methodologies. However, we
now use 24m forward EPS and BVPS to set our 12m forward target price. Accordingly,
we apply a 10% discount to our erstwhile target multiples given lower visibility of the
same, with PE multiple at 18x from 20x and PB at 2.5x from 2.8x. Accordingly, we arrive
at a 12-month target price of INR534, implying a total potential return (including
dividends) of 52%. We retain our Overweight (V) rating on the stock.

Key risks include: 1) Liquidity crisis leading to slower than expected growth, 2)
Significantly worse than expected asset quality, 3) Slower branch expansion