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Yes Bank delivered a robust 52% growth in PAT to INR 1.91 bn in Q3FY11, higher
than our initial estimate of INR 1.86 bn, on back of robust other income. Key
highlight of the quarter was the modest pace of growth—2.6% Q-o-Q (by its
standard)—reflecting stance of focus on protecting margins due to rising cost of
funds leading to moderation in the pace of NII growth. Reported spreads remained
stable; however, margins declined 20bps, reflecting slower improvement in
investment yields. The bank’s asset quality continues to be benign with positives
emerging from lower NPL provisions.
Growth getting more rational and broad based
Led by run-down of the telecom exposure and the bank’s conscious decision to
curtail growth given the rate environment and focus on margin protection, Yes
Bank’s loan growth cooled off to 2.6% Q-o-Q against average ~16% delivered in
the past two quarters. Broad-basing of credit to commercial banking and retail,
which began in Q2, continued in Q3FY11 in line with the bank’s VERSION 2
strategy, reducing the share of corporate book. Management expects loan book
growth of 55-60% in FY11E, implying a 14% sequential pick up in Q4FY11
largely led by need to meet priority sector commitments. We believe given the
tight liquidity environment and higher interest rates it will be difficult for Yes
Bank to sustain historical runrate given its vulnerability to rising cost.
Fee income rebounds
After a couple of quarters of modest fee income performance, led by pick up in
the transaction banking segment (up 30% Q-o-Q) and financial markets (up 2x
Q-o-Q), the bank’s fee income posted a healthy 23.5% Q-o-Q growth.
Management expects traction to continue, as it leverages new business
relationships. Financial advisory fees (savior in Q1) came off 16% Q-o-Q,
reflecting lumpiness in income stream.
Outlook and valuations: Balanced growth; maintain ‘BUY’
With capital in place, we expect Yes Bank could grow well above system, albeit
at a slower pace, delivering superior earnings (at ~41% CAGR over FY10-12E)
and attractive RoEs of 23% by FY12E. Near-term growth could be lower by its
own standard given the focus on margin in the current rate environment.
However, a well entrenched fee income platform coupled with lower credit cost
will deliver high RoAs of 1.5%. Also, management has demonstrated its strong
execution capabilities by successfully managing the bank during the cyclical
downturn. The stock is currently trading at 2x FY12E adjusted book and 9.7 x
FY12E earnings. We maintain ‘BUY/Sector Performer’ recommendation/rating
on the stock.
Reported margins decline 20bps
Yes Bank’s reported margins declined 20bps to 3.1%. Spreads, however, improved
10bps, led by 50bps improvement in yield on advances offsetting the 40bps rise in cost
of funds. Impact of higher leverage also contributed to margin decline. Slower
improvement in investment yields led to margin decline. In the medium term, given the
flattening of the yield curve and the bank’s ambition of growing 2x the industry, we
believe margins will continue to remain under pressure. We are building in margins of
2.6% over FY12E against 2.8% in FY10.
Branch expansion strategy: Key growth driver
Over the next few quarters, as balance sheet continues to grow (above industry),
building a deposit franchisee will be extremely critical. The subdued interest rate
environment has enabled Yes Bank to maintain higher margins. Margins could, however,
be hit, if branch expansion/improving productivity from new branch strategy does not
lead to lower yet stable retail deposit franchise or improve the current account balances
from existing relationships. The bank is currently operating 181 branches and intends to
reach 250 branches by June 2011. Delay in increasing the branch network/presence
could be a key risk to the bank’s ambition of increasing its CASA ratio by ~2-3% points
Y-o-Y.
Asset quality continues to be benign
The bank’s headline asset quality indicators continued to be healthy due to controlled
slippages and higher recoveries. With weak assets of INR 1.55 bn (reported gross nonperforming
assets (NPAs) + standard asset restructuring) below ~1%, we believe the
bank is in a better position to navigate asset quality pressures. Management disclosed
that Yes Bank’s telecom exposure to 2G players is around 7.6% of total book with no
exposure to new telecom service providers. Also, MFI exposure is restricted to 0.94% of
loan book spread over 15 accounts with NIL over dues.
Higher core income aiding cost-to-income improvement
Yes Bank’s cost-to-income ratio for Q3FY11 declined 80bps Q-o-Q to 35.8%, an
impressive statistic due to strong growth in the core income. During the quarter, it added
~159 employees, taking its total employee strength to 3,785. With the stated objective
of expanding branch network by 70 and adding 100 employees per month, cost-toincome
ratio has an upward bias. We have built in cost-to-income ratio of 37% for over
FY11-12.
Company Description
YES BANK is a private Indian bank promoted by Rana Kapoor and Ashok Kapur with
financial support from Rabobank Nederland, and global institutional private equity
investors –AIF Capital, and ChrysCapital. It is operational since November 2004 and is
the only greenfield bank approved by RBI in last decade. It has market cap of INR 95 bn
and balance sheet of ~INR 522 bn. It has branch network of 173 at the end of Q2FY11
and a CASA ratio of 10.1%. Corporate lending forms 68% of its book, commercial 22%
and retail 10%.
Investment Theme
YES BANK is one of the few private sector banks with product depth, sustainable
competitive edge, and strong growth. Given the underlying credit demand and small
asset book, the loan book is expected to grow at more than 35% for the next two years.
The bank’s high proportion of fee income enables high return on assets (of 1.6%+) and
indicates its potential of generating higher than presently reported RoE (20%+), once
the capital ratios normalise. Considering the bank’s strong fundamentals reflected in its
product width, adept management, and technological prowess, we find it to be the
perfect acquisition candidate for a foreign player, once the regulations ease.
Key Risks
Lower CASA can be a negative for the bank at this point of time when most banks are
banking on their franchise network.
In the event of demand for credit dying down as in the current scenario, lack of pricing
power can impact its margins adversely (due to nascent deposit franchise).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Yes Bank delivered a robust 52% growth in PAT to INR 1.91 bn in Q3FY11, higher
than our initial estimate of INR 1.86 bn, on back of robust other income. Key
highlight of the quarter was the modest pace of growth—2.6% Q-o-Q (by its
standard)—reflecting stance of focus on protecting margins due to rising cost of
funds leading to moderation in the pace of NII growth. Reported spreads remained
stable; however, margins declined 20bps, reflecting slower improvement in
investment yields. The bank’s asset quality continues to be benign with positives
emerging from lower NPL provisions.
Growth getting more rational and broad based
Led by run-down of the telecom exposure and the bank’s conscious decision to
curtail growth given the rate environment and focus on margin protection, Yes
Bank’s loan growth cooled off to 2.6% Q-o-Q against average ~16% delivered in
the past two quarters. Broad-basing of credit to commercial banking and retail,
which began in Q2, continued in Q3FY11 in line with the bank’s VERSION 2
strategy, reducing the share of corporate book. Management expects loan book
growth of 55-60% in FY11E, implying a 14% sequential pick up in Q4FY11
largely led by need to meet priority sector commitments. We believe given the
tight liquidity environment and higher interest rates it will be difficult for Yes
Bank to sustain historical runrate given its vulnerability to rising cost.
Fee income rebounds
After a couple of quarters of modest fee income performance, led by pick up in
the transaction banking segment (up 30% Q-o-Q) and financial markets (up 2x
Q-o-Q), the bank’s fee income posted a healthy 23.5% Q-o-Q growth.
Management expects traction to continue, as it leverages new business
relationships. Financial advisory fees (savior in Q1) came off 16% Q-o-Q,
reflecting lumpiness in income stream.
Outlook and valuations: Balanced growth; maintain ‘BUY’
With capital in place, we expect Yes Bank could grow well above system, albeit
at a slower pace, delivering superior earnings (at ~41% CAGR over FY10-12E)
and attractive RoEs of 23% by FY12E. Near-term growth could be lower by its
own standard given the focus on margin in the current rate environment.
However, a well entrenched fee income platform coupled with lower credit cost
will deliver high RoAs of 1.5%. Also, management has demonstrated its strong
execution capabilities by successfully managing the bank during the cyclical
downturn. The stock is currently trading at 2x FY12E adjusted book and 9.7 x
FY12E earnings. We maintain ‘BUY/Sector Performer’ recommendation/rating
on the stock.
Reported margins decline 20bps
Yes Bank’s reported margins declined 20bps to 3.1%. Spreads, however, improved
10bps, led by 50bps improvement in yield on advances offsetting the 40bps rise in cost
of funds. Impact of higher leverage also contributed to margin decline. Slower
improvement in investment yields led to margin decline. In the medium term, given the
flattening of the yield curve and the bank’s ambition of growing 2x the industry, we
believe margins will continue to remain under pressure. We are building in margins of
2.6% over FY12E against 2.8% in FY10.
Branch expansion strategy: Key growth driver
Over the next few quarters, as balance sheet continues to grow (above industry),
building a deposit franchisee will be extremely critical. The subdued interest rate
environment has enabled Yes Bank to maintain higher margins. Margins could, however,
be hit, if branch expansion/improving productivity from new branch strategy does not
lead to lower yet stable retail deposit franchise or improve the current account balances
from existing relationships. The bank is currently operating 181 branches and intends to
reach 250 branches by June 2011. Delay in increasing the branch network/presence
could be a key risk to the bank’s ambition of increasing its CASA ratio by ~2-3% points
Y-o-Y.
Asset quality continues to be benign
The bank’s headline asset quality indicators continued to be healthy due to controlled
slippages and higher recoveries. With weak assets of INR 1.55 bn (reported gross nonperforming
assets (NPAs) + standard asset restructuring) below ~1%, we believe the
bank is in a better position to navigate asset quality pressures. Management disclosed
that Yes Bank’s telecom exposure to 2G players is around 7.6% of total book with no
exposure to new telecom service providers. Also, MFI exposure is restricted to 0.94% of
loan book spread over 15 accounts with NIL over dues.
Higher core income aiding cost-to-income improvement
Yes Bank’s cost-to-income ratio for Q3FY11 declined 80bps Q-o-Q to 35.8%, an
impressive statistic due to strong growth in the core income. During the quarter, it added
~159 employees, taking its total employee strength to 3,785. With the stated objective
of expanding branch network by 70 and adding 100 employees per month, cost-toincome
ratio has an upward bias. We have built in cost-to-income ratio of 37% for over
FY11-12.
Company Description
YES BANK is a private Indian bank promoted by Rana Kapoor and Ashok Kapur with
financial support from Rabobank Nederland, and global institutional private equity
investors –AIF Capital, and ChrysCapital. It is operational since November 2004 and is
the only greenfield bank approved by RBI in last decade. It has market cap of INR 95 bn
and balance sheet of ~INR 522 bn. It has branch network of 173 at the end of Q2FY11
and a CASA ratio of 10.1%. Corporate lending forms 68% of its book, commercial 22%
and retail 10%.
Investment Theme
YES BANK is one of the few private sector banks with product depth, sustainable
competitive edge, and strong growth. Given the underlying credit demand and small
asset book, the loan book is expected to grow at more than 35% for the next two years.
The bank’s high proportion of fee income enables high return on assets (of 1.6%+) and
indicates its potential of generating higher than presently reported RoE (20%+), once
the capital ratios normalise. Considering the bank’s strong fundamentals reflected in its
product width, adept management, and technological prowess, we find it to be the
perfect acquisition candidate for a foreign player, once the regulations ease.
Key Risks
Lower CASA can be a negative for the bank at this point of time when most banks are
banking on their franchise network.
In the event of demand for credit dying down as in the current scenario, lack of pricing
power can impact its margins adversely (due to nascent deposit franchise).
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