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YES Bank (YES)
Banks/Financial Institutions
Sustaining margins should remain top priority. During the quarter, Yes Bank saw
the focus shift to protect margins and slowdown in loan growth. Low CASA ratio and
short duration liability base is resulting in a sharper increase in funding costs compared
to industry, resulting in a slower loan growth and higher impact on margins. Valuations
have corrected sharply and are attractive at 2.1X FY2012E PBR and 10X PER. Return
ratios at 1.5% RoA and 20%+ RoE remain strong. We revise our earnings somewhat
lower to factor the current environment. Retain BUY with a TP of `370 (`400 earlier)
Focus on margins amidst tight liquidity
On expected lines, the focus shifted from loan growth towards margins – loans grew by 3%
sequentially compared to about 10% for the industry. Due to a lower duration liability base,
funding costs have risen by 40 bps, resulting in a margin decline of 20 bps, despite lower growth.
We believe that Yes Bank will be very prompt in raising lending rates, but does run a risk of slower
growth if current tight environment persists. We remain comfortable with the asset quality and do
not expect any near-term cause of concern. We are reducing our loan growth expectation for Yes
Bank to 30% CAGR over FY2011-13E versus 35% earlier and also build somewhat lower margins
(management guidance still remain much higher). Our revised earnings are 1% lower for FY2012E
and 3% for FY2013E. Valuations at 2.1XFY2012E PBR and 10XFY2012E PER are attractive for
consistently maintained RoA of ~1.5% and RoEs of >20%. Retain BUY with a revised price target
of `370 (`400 earlier). The revision is on account of somewhat lower earnings and a higher cost of
equity (given the higher interest rates).
Sequential loan growth slower, but overall growth remains healthy
Loans grew by just 3% sequentially, but were higher by 66% yoy, on the back of impressive
performance in 1HFY11 benefitting from a reasonably easy liquidity/interest rate environment. The
bank has increased exposure to SME loans (22% of loans compared to 20% in September 2010)
on the back of improved confidence in asset quality and better pricing power. Telecom exposure
has reduced to 14% of loans from 23% in June 2010. We expect loan growth to remain higher
than industry average at about 30% CAGR (lower than our previous estimate of 35% CAGR for
FY2011-13E) and pick up pace in FY2012E as the lending yields stabilize for the entire industry,
making it easier for Yes Bank to grow its balance sheet.
Margins decline 20 bps to 2.8%; CASA ratio maintained at 10.2%
Pressure on margins was visible during the quarter with NIMs declining 20 bps qoq to 2.8%
on the back of sharp rise in cost of deposits. Cost of deposits increased by 40 bps qoq while
lending yields improved 50 bps. Net interest income grew by 53% yoy and 3% qoq to `3.2
bn. CD ratio improved by 310 bps to 79% qoq. Deposits growth was at 79% yoy (flat qoq),
primarily led by CASA deposits which grew by 81% yoy (flat qoq). CASA ratio for the
quarter was flat at 10.2% qoq and partly aided by a decline in deposits qoq. Improvement in
CASA ratio continues to remain a struggle despite a slower balance sheet growth during the
quarter.
Performance in transaction banking improves; overall non-interest income grew
27% yoy
Non-interest income grew by 27% yoy with better contribution of fee income from
transaction banking business. Transaction banking grew by 34% yoy; financial advisory grew
13% yoy and retail fee growth tripled—albeit on a lower base. Our key concern remains on
the transaction banking fee income whose contribution to overall fee income is volatile in
nature. Overall contribution of non-interest income to overall assets is at 1.2% of average
assets as compared to 1.8% in December 2009 as focus was on balance sheet growth in
FY2011E.
Other highlights for the quarter
` Cost-income ratio for the quarter declined to 36% from 37% in September 2010. The
impact of hiring (159 in 3QFY11 and 25% since March 2010) resulted in staff costs to
grow 41% yoy. Provisions for staff costs were flat for the quarter. The bank added 14
branches during the quarter, taking its total branches to 185 and expects to reach 250
branches in 1HFY12E. We are building FY2011E cost-income ratio at 38% compared to
37% on the back of 9MFY11 costs.
` Asset quality was stable for the quarter with gross NPLs at 0.2% of loans and net NPLs
0.06% of loans. Restructured assets increased marginally to `837 mn compared to `690
mn in September 2010. Asset quality remains comfortable for the bank and we are
building gross NPLs to rise to 0.8% by FY2012E.
` The rapid growth in balance sheet has resulted in tier-1 ratio declining to 10.4% from
13% in March 2010. The pace of capital consumption (about 100 bps of tier-1 each
quarter) indicates that the bank would need to raise capital in FY2012E to maintain the
current growth trajectory.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
YES Bank (YES)
Banks/Financial Institutions
Sustaining margins should remain top priority. During the quarter, Yes Bank saw
the focus shift to protect margins and slowdown in loan growth. Low CASA ratio and
short duration liability base is resulting in a sharper increase in funding costs compared
to industry, resulting in a slower loan growth and higher impact on margins. Valuations
have corrected sharply and are attractive at 2.1X FY2012E PBR and 10X PER. Return
ratios at 1.5% RoA and 20%+ RoE remain strong. We revise our earnings somewhat
lower to factor the current environment. Retain BUY with a TP of `370 (`400 earlier)
Focus on margins amidst tight liquidity
On expected lines, the focus shifted from loan growth towards margins – loans grew by 3%
sequentially compared to about 10% for the industry. Due to a lower duration liability base,
funding costs have risen by 40 bps, resulting in a margin decline of 20 bps, despite lower growth.
We believe that Yes Bank will be very prompt in raising lending rates, but does run a risk of slower
growth if current tight environment persists. We remain comfortable with the asset quality and do
not expect any near-term cause of concern. We are reducing our loan growth expectation for Yes
Bank to 30% CAGR over FY2011-13E versus 35% earlier and also build somewhat lower margins
(management guidance still remain much higher). Our revised earnings are 1% lower for FY2012E
and 3% for FY2013E. Valuations at 2.1XFY2012E PBR and 10XFY2012E PER are attractive for
consistently maintained RoA of ~1.5% and RoEs of >20%. Retain BUY with a revised price target
of `370 (`400 earlier). The revision is on account of somewhat lower earnings and a higher cost of
equity (given the higher interest rates).
Sequential loan growth slower, but overall growth remains healthy
Loans grew by just 3% sequentially, but were higher by 66% yoy, on the back of impressive
performance in 1HFY11 benefitting from a reasonably easy liquidity/interest rate environment. The
bank has increased exposure to SME loans (22% of loans compared to 20% in September 2010)
on the back of improved confidence in asset quality and better pricing power. Telecom exposure
has reduced to 14% of loans from 23% in June 2010. We expect loan growth to remain higher
than industry average at about 30% CAGR (lower than our previous estimate of 35% CAGR for
FY2011-13E) and pick up pace in FY2012E as the lending yields stabilize for the entire industry,
making it easier for Yes Bank to grow its balance sheet.
Margins decline 20 bps to 2.8%; CASA ratio maintained at 10.2%
Pressure on margins was visible during the quarter with NIMs declining 20 bps qoq to 2.8%
on the back of sharp rise in cost of deposits. Cost of deposits increased by 40 bps qoq while
lending yields improved 50 bps. Net interest income grew by 53% yoy and 3% qoq to `3.2
bn. CD ratio improved by 310 bps to 79% qoq. Deposits growth was at 79% yoy (flat qoq),
primarily led by CASA deposits which grew by 81% yoy (flat qoq). CASA ratio for the
quarter was flat at 10.2% qoq and partly aided by a decline in deposits qoq. Improvement in
CASA ratio continues to remain a struggle despite a slower balance sheet growth during the
quarter.
Performance in transaction banking improves; overall non-interest income grew
27% yoy
Non-interest income grew by 27% yoy with better contribution of fee income from
transaction banking business. Transaction banking grew by 34% yoy; financial advisory grew
13% yoy and retail fee growth tripled—albeit on a lower base. Our key concern remains on
the transaction banking fee income whose contribution to overall fee income is volatile in
nature. Overall contribution of non-interest income to overall assets is at 1.2% of average
assets as compared to 1.8% in December 2009 as focus was on balance sheet growth in
FY2011E.
Other highlights for the quarter
` Cost-income ratio for the quarter declined to 36% from 37% in September 2010. The
impact of hiring (159 in 3QFY11 and 25% since March 2010) resulted in staff costs to
grow 41% yoy. Provisions for staff costs were flat for the quarter. The bank added 14
branches during the quarter, taking its total branches to 185 and expects to reach 250
branches in 1HFY12E. We are building FY2011E cost-income ratio at 38% compared to
37% on the back of 9MFY11 costs.
` Asset quality was stable for the quarter with gross NPLs at 0.2% of loans and net NPLs
0.06% of loans. Restructured assets increased marginally to `837 mn compared to `690
mn in September 2010. Asset quality remains comfortable for the bank and we are
building gross NPLs to rise to 0.8% by FY2012E.
` The rapid growth in balance sheet has resulted in tier-1 ratio declining to 10.4% from
13% in March 2010. The pace of capital consumption (about 100 bps of tier-1 each
quarter) indicates that the bank would need to raise capital in FY2012E to maintain the
current growth trajectory.
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