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Yes bank is a new age private sector bank founded by Mr. Rana Kapoor, having a proven track
record as professional entrepreneur in establishing and managing Rabo India Finance Private
Limited (RIFL), a joint venture with Rabobank. Yes Bank started its operations with a focus on
Corporate and Institutional business, but since then it has been gradually shifting its stance
towards Retail. We believe, with the bank’s growing focus towards branch banking and
increasing low cost CASA deposits (led by rapid branch expansion) will lead to expansion in
valuation multiples going forward. We initiate coverage on Yes Bank with a BUY rating and a
price target of `335.3/share, implying an upside potential of 28.9% from current levels.
Investment Arguments
Healthy asset quality – Low MFI exposure (~1% of loan portfolio), Telecom portfolio
more inclined towards big players with strong parent backing – Yes Bank has so far
been able to manage its asset quality well led by bank’s stringent lending norm coupled
with prudent risk management policies. For the quarter ended September 30, 2010, GNPA
and NNPA stood at 0.22% and 0.06%, respectively. The company has also seen a slight
decline in its restructured portfolio during Q2 FY11. Restructured advances as a
percentage of loans stood at 0.23% which is amongst the lowest in the sector.
Focused strategy to expand geographical reach – Liability franchise to improve
consequently – The bank intends to primarily have a geographical presence in the northwestern
part of the country and intends to open 250 branches pan India by June 2011 and
750 branches by 2015. With the bank’s focus to expand its geographical reach in the
liability rich north-western part of the country, CASA ratio is likely to improve gradually
going forward. We expect share of CASA deposits to increase from 10.5% in FY10 to
15.3% in FY13E growing at a CAGR growth of 65.3% as against CAGR growth of 46.0% in
deposits.
Robust business growth to continue – Growth in Retail and SMEs segment to be the
next major focus area – Yes Bank has seen strong traction in its business growth in the
current year with advances and deposits registering a growth of 86.3% and 106.6% YoY,
respectively, as on September 30, 2010. Going forward, we expect a CAGR growth of
43.7% and 46.0% in advances and deposits for FY10-13E for the bank on the back of its
growing focus towards branch banking, improving credit growth and aggressive branch
expansion plans.
Margins to get slightly impacted led by rising wholesale deposit rates, however,
increase in CASA, ability to pass on additional cost burden and re-pricing of assets
will provide some support to the margins going forward – Yes Bank is primarily funded
by wholesale sources with CASA ratio of only 10.1% as on September 30, 2010, which
puts it at a disadvantage. However, we believe the bank’s focus to increase its CASA
deposit, ability to pass on the increased cost to the borrowers and well matched ALM will
come to its rescue.
Valuations – We estimate Yes Bank to report an EPS CAGR of 32.6% over FY10-FY13E
driven by robust business growth, lower credit costs and stable fee income. ABV is
estimated to grow at 22.9% CAGR during the same period. The bank’s strong asset quality,
superior return ratios, strong asset growth and adequate capitalization bodes well for its
future growth. The stock currently trades at 1.5x FY13E ABV and 7.9x FY13E EPS which
we believe is attractive considering its strong growth prospects. We initiate coverage with a
price target of `335.3/share, implying an upside of 28.9%.
Industry Section
Deposit growth continues to lag behind the credit growth – With the upsurge in economic activity, credit
off-take remained robust over the last few months. Bank credit has registered a 23.7% growth YoY. The credit
reported as on 17th December 2010 stood at `36.4tn as against `29.4tn on 18th December 2009. However,
deposit growth continues to remain muted registering a YoY growth of 14.7% as against 17.9% in the same
fortnight last year. As a result of robust credit growth coupled with muted deposit growth, the incremental CD
ratio has risen to ~113.4%. With growth drivers in place such as robust economic growth, rising industrial
production and improving consumer confidence the credit growth for the system is expected to remain healthy
going forward. We estimate credit growth for the banking system to grow more than the RBI target of 20.0% in
the current fiscal, mainly led by demand for funds for large scale investment in infrastructure projects,
acquisitions by companies, huge plans of the corporates in the power, steel, telecom and petroleum products
and a strong demand for working capital expenditure.
Acute liquidity shortage in the system, short term rates hardened – Indian banking sector is currently
lingering with acute liquidity shortage in the system. As a result of tight liquidity, wholesale rates rose sharply
by ~150-200 bps (more at the shorter end of the yield curve) over the past few months. Banks dependent
largely on wholesale deposits may see their cost of funds going up. The liquidity position has tightened in late
May after the banks mobilized resources to fund telecom players (`674 bn for 3G auction and `385 bn for
BWA auction) which had won the bids for spectrum, besides providing for advance tax payment. Since then
liquidity continued to remain tight. Added to this, lower deposit mobilization in the current year and building
cash balances with the government further aggravated the liquidity tightening. Due to the present tightness,
banks have been borrowing more than `1000 bn daily, on average, since early November from the repo
window of RBI. Despite several steps by the central bank in recent times, such as reducing banks’ Statutory
Liquidity Ratio and infusing money via open market purchases of government bonds, the liquidity deficit
continued to be much above the comfort zone of RBI, which is around `500 bn.
Banks unleashing deposit rate war, Resorting towards CD at higher rates to raise funds, raising BPLR
and base rate to protect their margins – Cash crunch and low growth in bank deposits have forced banks
to raise funds from the money market at close to double-digit rates over the last few weeks. Added to this,
banks are aggressively raising their deposit rates, unleashing a rate war to mobilize deposits. Most banks
raised retail deposit rates by 50-150bps in December. On the flip side, in order to protect their margins, banks
had done the first upward revision of their base rate. Most banks had revised their base rate in December by
around 50 bps each. Although a part of the rate increase in deposits is passed on to the customers, however
inability to pass on the entire cost burden might put some pressure on bank’s margin going forward.
I
nflation continues to remain in double digit, another round of rate hikes on the cards – With inflation
continue to remain in double digits, the interest rate is expected to continue to move upwards in the
immediate future. Food price inflation jumped to 18.32% in the week to December 25 from 14.44% a week
before. Inflation based on the Wholesale Price Index eased to 7.48% in November from 8.58% in the previous
month, mainly due to a high base. The RBI, in its mid-quarter review on December 16, had indicated that
although inflation has started to ease, it is not yet in the comfort zone. The central bank also said it needs to
continue vigilance on the inflation front to prevent build up of demand side pressures, adding there was an
upside risk to its projection of 5.5% inflation by March. In 2010, the RBI has hiked repo rate by 150 bps to
6.25%, reverse repo rate by 200 bps to 5.25% and CRR by 100 bps to 6%. The recent increased inflation may
leave the RBI with no choice but to hike policy rates to contain inflation and inflationary expectations.
Sector Outlook
In the rising interest rate environment, banks with diversified deposit franchise and high proportion of low-cost
deposits will be in a better position to capture the up-tick in credit growth in a more profitable manner. With the
onset of the result season, the movement in the banking stocks would largely follow their core performance. In
Q3 FY11 we believe core earnings of the bank to remain strong led by robust credit growth coupled with
muted growth in deposits. However, hardening of bond yields might keep the treasury gains subdued and
consequently non interest income might face some pressure. On the margins front, banks may see some
pressure although marginal as bank’s recent hike in lending rates coupled with re-pricing of assets would
absorb to some extent the increase in cost of funds due to aggressive deposit rate hikes. Over the last few
weeks, banking stocks has corrected significantly led by concerns relating to margin compression because of
aggressive deposit rate hike by the banks to bridge the large gap between deposit and credit growth.
Additionally, liquidity crisis currently in the system coupled with exposure of banks to some of the
controversial sectors like Telecom, Realty, and Microfinance further aggravated the correction. Going forward,
we believe any negative news flow emanating from the above mentioned sectors could keep the banking
stocks under pressure.
Investment Rationale
Focused strategy to expand geographical reach – Liability franchise to improve consequently – Yes
Bank started its operations with a focus on Corporate and Institutional business. But since then it has been
gradually shifting its stance to Retail. The bank intends to primarily have a geographical presence in the northwestern
part of the country and intends to open 250 branches pan India by June 2011 and 750 branches by
2015. There was an execution delay with respect to branch expansion in the last fiscal. However, going
forward, the branch roll – out programme will gain momentum since the newer branches will primarily be
smaller in size leading to faster roll out. It plans to adopt a Hub-Spoke model to open the new branches,
where in they would save up to 50% in capex to set-up new branch (average cost of setting a hub branch -
`8-10 mn as against `4-6 mn for spoke branches). Currently, the bank has 90 spoke branches out of total 171
branches. Going forward the management intends to open 500 spoke branches i.e. ~86.0% of the new
branch roll-outs by FY15E thereby leading to faster roll-outs. We expect 375 branches by FY13E, which
should help improve the liability profile of the bank and provide some support to margin.
Yes Bank is primarily funded by wholesale sources with CASA ratio of only 10.1% as on September 30, 2010.
This leaves the bank with relatively higher exposure to any tightness in liquidity and rise in domestic interest
rates. However, we believe with the bank’s focus to expand its geographical reach in the liability rich northwestern
part of the country, CASA ratio is likely to improve gradually going forward. We expect share of CASA
deposits to increase from 10.5% in FY10 to 15.3% in FY13E growing at a CAGR growth of 65.3% as against
CAGR growth of 46.0% in deposits. In addition to increase in CASA deposits, the aggressive branch
expansion will lead to more broad based deposit base with share of retail deposits gradually increasing
(currently 20% of the total deposits).
Healthy asset quality – Low MFI exposure (~1% of loan portfolio), Telecom portfolio more inclined
towards big players with strong parent backing – Yes Bank has so far been able to manage its asset
quality well and we believe it will continue to do so going forward. The Bank’s stringent lending norm coupled
with prudent risk management policies has helped the company achieve this. Recently, the stock has
underperformed the overall banking index with the controversy in Telecom Sector (cancellation of licenses
allotted for 2G) and MFI sector gaining pace, as the bank has exposure to both these sectors. However, the
management has clarified that its total exposure to the MFI sector is only ~`3 bn which is ~1% of the total
loan book. Out of these, ~`0.75-0.80 bn pertain to Andhra Pradesh where the problem lies. The management
has indicated that currently all the loans to MFIs are performing and the bank is not witnessing any delay in
repayments. However, we believe with the recent developments taking place in the MFI space, the bank
might see some slippages or may go for restructuring going forward. As far as the exposure to Telecom
players is concerned, the management has indicated that the total exposure to the telecom players is ~11% of
the total loan book i.e ~`35 bn. Out of these 5% of the loans (i.e. `15 bn) are given for 2G spectrum and is
largely given to large players with strong parent backing. Thus we do not foresee any significant slippages
going forward. We expect GNPA and NNPA to be around 0.53% and 0.12% respectively by FY13E.
For the quarter ended September 30, 2010, gross NPA as a percent of gross advances stood at 0.22%,
whereas, net NPA as a percent of net advances stood at 0.06%. The company has also seen a slight decline
in its restructured portfolio during Q2 FY11. Restructured advances as a percentage of loans are at 0.23%
which is amongst the lowest in the sector. Total NPL coverage ratio including general provisions is at 299%
as of Q2 FY11, whereas specific loan loss coverage ratio stood at 74.7%. Going forward, with near zero
unsecured SME lending and major focus on large corporate, the asset quality is expected to remain strong.
Well Capitalized to support its aggressive growth plans – Yes Bank is well capitalized with a Capital
Adequacy Ratio (CAR) of 19.4% as on September 30, 2010. Of this, Tier I Capital accounted for 11.0% as
against 9.4% as at September 30, 2009. In Q2 FY11 the bank has successfully raised over `11.7 bn through
Upper (`6.4 bn) as well as Lower Tier II (`3.1 bn), and Tier I Perpetual Bonds (`2.25 bn). Yes Bank’s ability to
raise capital at premium valuation at regular interval bodes well for its future growth. We believe, given the
scorching pace of growth in wholesale loan book, the bank may go for capital raising over the next 12 months.
The bank still has headroom of raising ~`4 bn capital from Tier II at this point in time. With such a strong
capital base, Yes bank is all set to support its growth plans going forward.
Robust business growth to continue – Growth in Retail and SMEs segment to be the next major focus
area – Yes Bank has seen strong traction in its business growth in the current fiscal year with advances and
deposits registering a growth of 86.3% and 106.6% YoY, respectively, as on September 30, 2010. Yes Bank’s
loan growth has been largely driven by the corporate segment where the bank focuses on key growth sectors
such as Food and Agriculture, Healthcare & Life Sciences, Media and Entertainment, Light Engineering,
Telecommunications, Information Technology, Infrastructure and Retailing amongst others. These sectors
constitute approximately 80.3% of the total advances as on September 30, 2010 (as can be seen from the
graph below). The Banks knowledge based lending to these sectors provides a competitive edge over its
peers. The knowledge capabilities and sectoral expertise of the team has enabled the bank to capture
significant market share and to bring sustainability in its revenue. During the current fiscal, strong demand for
funds from the telecom sector for 3G funding has also helped the bank in registering robust credit growth. Yes
Bank's advances are primarily into the corporate segment (corporate & institutional business) which accounts
for ~69.8% of the total advance book. Loans to mid corporates (commercial banking) and branch banking
(constituting both SMEs and Retail) accounts for 19.6% and ~10.6% of the portfolio, respectively. Going
forward, the management has indicated that the bank will increasingly focus on building SME and Retail loan
portfolio and expects the commercial and branch banking portfolio to increase to 30% each by FY15E.
Recently, the bank has raised $25 mn from US-based Wells Fargo Bank to be used exclusively for lending in
the SME segment.
Going ahead, as retail banking gains momentum, the bank will be able to focus on enhancing its yield on
assets (yield from retail assets is higher) and contain its cost of funds (with accesses to CASA deposits) which
will in turn stabilize its net margins. Going forward, we expect a CAGR growth of 43.7% and 46.0% in
advances and deposits for FY10-13E for the bank on the back of its growing focus towards branch banking,
improving credit growth and aggressive branch expansion plans.
Margins to get slightly impacted led by rising wholesale deposit rates, however, increase in CASA,
ability to pass on additional cost burden and re-pricing of assets will provide some support to the
margins going forward – Yes Bank is primarily funded by wholesale sources with CASA ratio of only 10.1%
as on September 30, 2010, which puts it at a disadvantage. Though we expect the share of CASA to increase
from 10.5% in FY10 to 15.3% in FY13E led by rapid branch expansion, the bank would still be heavily
dependent on wholesale funding. Recently, the wholesale deposit rate shot up very sharply (as can be seen
from the graph below) led by acute liquidity shortage in the banking system. The average borrowing by the
banks through the RBI’s repo window over the last two months has been ~ `1000 bn, reflecting the extent of
the shortage. However, we believe the liquidity situation to improve in Q4 mainly driven by higher government
spending, redemption of bonds and improvement in deposit mobilisation (as a result of aggressive deposit
rate hike by banks).
Although, Yes Bank is highly vulnerable to high wholesale deposit rates, however, we believe the bank’s
focus to increase its CASA deposit, ability to pass on the increased cost to the borrowers and well matched
ALM will come to its rescue. Yes bank is favorably placed in the rising interest rate scenario due to negative
asset liability duration with average asset duration of 17 months against average liability duration of 19
months. The management has indicated that around 95% of the bank’s total loan book is either linked to
prime lending rate or base rate or are less than one year in residual maturity. Consequently, re-pricing of
these assets over the next one year will absorb the increase in the cost of funds. On the liability side, with the
bank’s focus to expand its geographical reach in the liability rich north-western part of the country, CASA ratio
should gradually improve going forward thus providing some support to net interest margin. Added to this,
historically the bank has exhibited its strong ability to pass on the increased cost to the borrowers (as can be
seen from the graph below) because of the competitive advantage it has over the peer group in terms of
knowledge banking.
Core business supported by sustainable and diversified non-interest income – Non-Interest Income has
remained a major thrust area for the bank. The substantial contribution of non interest income to total net
income reflects the diversified revenue base of Yes Bank. Since its inception, non interest income contributed
on an average ~50% to its total net income. The robust growth in other income (CAGR growth of 99.6% over
FY05-10 although on a lower base) has helped the bank to withstand the downturn when the core business
was slowing down and emerge strongly post financial crisis.
Non-interest income consists of revenue originating from sales of Foreign Exchange and Treasury Products,
managing Financial Advisory & Merchant Banking Transactions, distribution of third party products,
Transaction Banking and Trade Finance activities. We expect a CAGR of 17.9% (on higher base) in non
interest income over FY11-13E likely driven by sustainable transaction banking revenues, healthy pipeline of
advisory services and growing focus on third party distributions.
The Banks strategy to cross sell wide range of financial products and services by leveraging the existing client
relationships is likely to boost profits through fee and fund based income going forward. The Bank has
witnessed a strong growth in its revenue from transaction banking, financial advisory services and third party
distribution (as can be seen from the graph above) in the recent quarters. The Bank’s focus on branch
banking and its strategy to mobilize SME clients has helped the bank to garner a large chunk from its
transaction banking services. The revenue from transaction banking are recurring in nature and is likely to
provide some stability to the non interest income stream as revenue from financial markets is volatile and is
dependent on market conditions. The management has indicated that the bank is increasingly focusing on
increasing branch banking fees (third party distribution & others). With rapid branch expansion, the branch
banking fee is likely to contribute an increasing share in the overall non-interest income stream. On the
advisory front, the bank has seen notable improvement in loan syndication and investment banking activities.
With the medium to long term outlook on equity markets and macro-economic prospects remaining stable,
fees from various advisory services are expected to grow at a healthy pace.
Return Ratios remains attractive despite capital raising at regular intervals – Yes Bank enjoys one of
the highest return ratios among its peer group largely driven by high share of non interest income in total
income and better operational efficiency. Added to this, the Bank’s focus on certain key growth sectors
wherein it has developed significant domain expertise has enabled the bank to offer customized financial
products to its clients. This approach also helped the bank to cross sell non-credit products and generate
substantial fee based revenues leading to superior return ratios. For the quarter ended September 30, 2010
the bank had annualized RoAE of 20.9% and RoAA of 1.5%. The Bank has been able to maintain these high
return ratios despite testing times. Going forward with the capital raising initiative taken by the bank during the
current quarter coupled with aggressive expansion plans, the return ratios may come under pressure in the
very near term. However, the ratios will start improving once the bank gets the full benefit of the additional
capital infused.
Operating expense ratio to improve going forward despite aggressive branch expansion and
employee recruitment plans mainly led by robust Net Interest Income growth and technological upgradation
– Yes Bank has witnessed considerable improvement in its operating efficiency over past 3 years
with cost to income ratio falling to 36.7% in FY10 from a high of 52.9% in FY07. We expect C/I ratio to
improve further by ~296 bps to 33.7% by FY13E despite aggressive branch expansion and employee
recruitment plans mainly driven by robust Net Interest Income (NII) growth, aggressive investment made in
technological up-gradation and continuous improvement in employee and branch productivity. We expect NII
to grow at a CAGR of 43.6% over FY10-FY13E driven by robust loan growth (CAGR growth of 43.7%),
increase in CASA base led by aggressive branch expansion plans (leading to cost minimization) and healthy
yield on investments.
Peer Group Analysis
Yes Bank is competitively placed among its peers and we expect the bank to deliver healthy NII (CAGR
43.6% FY10-13E) and earnings growth (CAGR 33.3% FY10-13E) going forward. The stock currently quotes
at a slight discount to its peers (TTM P/ABV of 2.6x for Yes Bank vs. 2.8x for peer group). Considering the
bank’s strong growth prospects coupled with its strong asset quality and adequate capitalization, we believe
the stock deserves a premium valuation as compared to its peer group. The bank has outpaced its peer group
with a 64.8% CAGR in Net Interest Income over the last three years as against 35.5% for the peerset. The
CAGR growth in PAT for the same period stood at 63.4% as against 42.6% for the peerset.
Valuations
We estimate Yes Bank to report an EPS CAGR of 32.6% over FY10-FY13E driven by robust business growth,
lower credit costs and stable fee income. ABV is estimated to grow at 22.9% CAGR during the same period.
The bank’s strong asset quality, superior return ratios, strong asset growth and adequate capitalisation bodes
well for its future growth. Added to this, we believe the bank’s growing focus towards branch banking and
increasing low cost CASA deposits (led by rapid branch expansion) will lead to expansion in valuation
multiples going forward.
The stock currently trades at 1.5x FY13E ABV and 7.9x FY13E EPS which we believe is attractive. We
initiate coverage with a price target of `335.3/share, implying an upside of 28.9% from current levels. We
have assigned 80% weight to P/ABV and 20% weight to P/E methodology.
Price-to-adjusted-book – Using a single-stage Gordon growth model, we value the bank on a FY13E ROAE
of 21.2%, cost of equity of 13.0% and growth of 5.0%, and arrive at a fair value of `339.8/ share (multiple of
2.0x).
Price-to-earnings – Based on Price to Earning, Yes Bank is trading at a discount to its peers. On a targeted
P/E multiple of 9.7x on FY13E EPS of `32.8/share we arrive at a target price of `317.3/share. Our targeted
P/E multiple reflects 20% discount to the current average multiple of the peer group (because of weak liability
franchise in comparison to peer group) for FY13E.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Yes bank is a new age private sector bank founded by Mr. Rana Kapoor, having a proven track
record as professional entrepreneur in establishing and managing Rabo India Finance Private
Limited (RIFL), a joint venture with Rabobank. Yes Bank started its operations with a focus on
Corporate and Institutional business, but since then it has been gradually shifting its stance
towards Retail. We believe, with the bank’s growing focus towards branch banking and
increasing low cost CASA deposits (led by rapid branch expansion) will lead to expansion in
valuation multiples going forward. We initiate coverage on Yes Bank with a BUY rating and a
price target of `335.3/share, implying an upside potential of 28.9% from current levels.
Investment Arguments
Healthy asset quality – Low MFI exposure (~1% of loan portfolio), Telecom portfolio
more inclined towards big players with strong parent backing – Yes Bank has so far
been able to manage its asset quality well led by bank’s stringent lending norm coupled
with prudent risk management policies. For the quarter ended September 30, 2010, GNPA
and NNPA stood at 0.22% and 0.06%, respectively. The company has also seen a slight
decline in its restructured portfolio during Q2 FY11. Restructured advances as a
percentage of loans stood at 0.23% which is amongst the lowest in the sector.
Focused strategy to expand geographical reach – Liability franchise to improve
consequently – The bank intends to primarily have a geographical presence in the northwestern
part of the country and intends to open 250 branches pan India by June 2011 and
750 branches by 2015. With the bank’s focus to expand its geographical reach in the
liability rich north-western part of the country, CASA ratio is likely to improve gradually
going forward. We expect share of CASA deposits to increase from 10.5% in FY10 to
15.3% in FY13E growing at a CAGR growth of 65.3% as against CAGR growth of 46.0% in
deposits.
Robust business growth to continue – Growth in Retail and SMEs segment to be the
next major focus area – Yes Bank has seen strong traction in its business growth in the
current year with advances and deposits registering a growth of 86.3% and 106.6% YoY,
respectively, as on September 30, 2010. Going forward, we expect a CAGR growth of
43.7% and 46.0% in advances and deposits for FY10-13E for the bank on the back of its
growing focus towards branch banking, improving credit growth and aggressive branch
expansion plans.
Margins to get slightly impacted led by rising wholesale deposit rates, however,
increase in CASA, ability to pass on additional cost burden and re-pricing of assets
will provide some support to the margins going forward – Yes Bank is primarily funded
by wholesale sources with CASA ratio of only 10.1% as on September 30, 2010, which
puts it at a disadvantage. However, we believe the bank’s focus to increase its CASA
deposit, ability to pass on the increased cost to the borrowers and well matched ALM will
come to its rescue.
Valuations – We estimate Yes Bank to report an EPS CAGR of 32.6% over FY10-FY13E
driven by robust business growth, lower credit costs and stable fee income. ABV is
estimated to grow at 22.9% CAGR during the same period. The bank’s strong asset quality,
superior return ratios, strong asset growth and adequate capitalization bodes well for its
future growth. The stock currently trades at 1.5x FY13E ABV and 7.9x FY13E EPS which
we believe is attractive considering its strong growth prospects. We initiate coverage with a
price target of `335.3/share, implying an upside of 28.9%.
Industry Section
Deposit growth continues to lag behind the credit growth – With the upsurge in economic activity, credit
off-take remained robust over the last few months. Bank credit has registered a 23.7% growth YoY. The credit
reported as on 17th December 2010 stood at `36.4tn as against `29.4tn on 18th December 2009. However,
deposit growth continues to remain muted registering a YoY growth of 14.7% as against 17.9% in the same
fortnight last year. As a result of robust credit growth coupled with muted deposit growth, the incremental CD
ratio has risen to ~113.4%. With growth drivers in place such as robust economic growth, rising industrial
production and improving consumer confidence the credit growth for the system is expected to remain healthy
going forward. We estimate credit growth for the banking system to grow more than the RBI target of 20.0% in
the current fiscal, mainly led by demand for funds for large scale investment in infrastructure projects,
acquisitions by companies, huge plans of the corporates in the power, steel, telecom and petroleum products
and a strong demand for working capital expenditure.
Acute liquidity shortage in the system, short term rates hardened – Indian banking sector is currently
lingering with acute liquidity shortage in the system. As a result of tight liquidity, wholesale rates rose sharply
by ~150-200 bps (more at the shorter end of the yield curve) over the past few months. Banks dependent
largely on wholesale deposits may see their cost of funds going up. The liquidity position has tightened in late
May after the banks mobilized resources to fund telecom players (`674 bn for 3G auction and `385 bn for
BWA auction) which had won the bids for spectrum, besides providing for advance tax payment. Since then
liquidity continued to remain tight. Added to this, lower deposit mobilization in the current year and building
cash balances with the government further aggravated the liquidity tightening. Due to the present tightness,
banks have been borrowing more than `1000 bn daily, on average, since early November from the repo
window of RBI. Despite several steps by the central bank in recent times, such as reducing banks’ Statutory
Liquidity Ratio and infusing money via open market purchases of government bonds, the liquidity deficit
continued to be much above the comfort zone of RBI, which is around `500 bn.
Banks unleashing deposit rate war, Resorting towards CD at higher rates to raise funds, raising BPLR
and base rate to protect their margins – Cash crunch and low growth in bank deposits have forced banks
to raise funds from the money market at close to double-digit rates over the last few weeks. Added to this,
banks are aggressively raising their deposit rates, unleashing a rate war to mobilize deposits. Most banks
raised retail deposit rates by 50-150bps in December. On the flip side, in order to protect their margins, banks
had done the first upward revision of their base rate. Most banks had revised their base rate in December by
around 50 bps each. Although a part of the rate increase in deposits is passed on to the customers, however
inability to pass on the entire cost burden might put some pressure on bank’s margin going forward.
I
nflation continues to remain in double digit, another round of rate hikes on the cards – With inflation
continue to remain in double digits, the interest rate is expected to continue to move upwards in the
immediate future. Food price inflation jumped to 18.32% in the week to December 25 from 14.44% a week
before. Inflation based on the Wholesale Price Index eased to 7.48% in November from 8.58% in the previous
month, mainly due to a high base. The RBI, in its mid-quarter review on December 16, had indicated that
although inflation has started to ease, it is not yet in the comfort zone. The central bank also said it needs to
continue vigilance on the inflation front to prevent build up of demand side pressures, adding there was an
upside risk to its projection of 5.5% inflation by March. In 2010, the RBI has hiked repo rate by 150 bps to
6.25%, reverse repo rate by 200 bps to 5.25% and CRR by 100 bps to 6%. The recent increased inflation may
leave the RBI with no choice but to hike policy rates to contain inflation and inflationary expectations.
Sector Outlook
In the rising interest rate environment, banks with diversified deposit franchise and high proportion of low-cost
deposits will be in a better position to capture the up-tick in credit growth in a more profitable manner. With the
onset of the result season, the movement in the banking stocks would largely follow their core performance. In
Q3 FY11 we believe core earnings of the bank to remain strong led by robust credit growth coupled with
muted growth in deposits. However, hardening of bond yields might keep the treasury gains subdued and
consequently non interest income might face some pressure. On the margins front, banks may see some
pressure although marginal as bank’s recent hike in lending rates coupled with re-pricing of assets would
absorb to some extent the increase in cost of funds due to aggressive deposit rate hikes. Over the last few
weeks, banking stocks has corrected significantly led by concerns relating to margin compression because of
aggressive deposit rate hike by the banks to bridge the large gap between deposit and credit growth.
Additionally, liquidity crisis currently in the system coupled with exposure of banks to some of the
controversial sectors like Telecom, Realty, and Microfinance further aggravated the correction. Going forward,
we believe any negative news flow emanating from the above mentioned sectors could keep the banking
stocks under pressure.
Investment Rationale
Focused strategy to expand geographical reach – Liability franchise to improve consequently – Yes
Bank started its operations with a focus on Corporate and Institutional business. But since then it has been
gradually shifting its stance to Retail. The bank intends to primarily have a geographical presence in the northwestern
part of the country and intends to open 250 branches pan India by June 2011 and 750 branches by
2015. There was an execution delay with respect to branch expansion in the last fiscal. However, going
forward, the branch roll – out programme will gain momentum since the newer branches will primarily be
smaller in size leading to faster roll out. It plans to adopt a Hub-Spoke model to open the new branches,
where in they would save up to 50% in capex to set-up new branch (average cost of setting a hub branch -
`8-10 mn as against `4-6 mn for spoke branches). Currently, the bank has 90 spoke branches out of total 171
branches. Going forward the management intends to open 500 spoke branches i.e. ~86.0% of the new
branch roll-outs by FY15E thereby leading to faster roll-outs. We expect 375 branches by FY13E, which
should help improve the liability profile of the bank and provide some support to margin.
Yes Bank is primarily funded by wholesale sources with CASA ratio of only 10.1% as on September 30, 2010.
This leaves the bank with relatively higher exposure to any tightness in liquidity and rise in domestic interest
rates. However, we believe with the bank’s focus to expand its geographical reach in the liability rich northwestern
part of the country, CASA ratio is likely to improve gradually going forward. We expect share of CASA
deposits to increase from 10.5% in FY10 to 15.3% in FY13E growing at a CAGR growth of 65.3% as against
CAGR growth of 46.0% in deposits. In addition to increase in CASA deposits, the aggressive branch
expansion will lead to more broad based deposit base with share of retail deposits gradually increasing
(currently 20% of the total deposits).
Healthy asset quality – Low MFI exposure (~1% of loan portfolio), Telecom portfolio more inclined
towards big players with strong parent backing – Yes Bank has so far been able to manage its asset
quality well and we believe it will continue to do so going forward. The Bank’s stringent lending norm coupled
with prudent risk management policies has helped the company achieve this. Recently, the stock has
underperformed the overall banking index with the controversy in Telecom Sector (cancellation of licenses
allotted for 2G) and MFI sector gaining pace, as the bank has exposure to both these sectors. However, the
management has clarified that its total exposure to the MFI sector is only ~`3 bn which is ~1% of the total
loan book. Out of these, ~`0.75-0.80 bn pertain to Andhra Pradesh where the problem lies. The management
has indicated that currently all the loans to MFIs are performing and the bank is not witnessing any delay in
repayments. However, we believe with the recent developments taking place in the MFI space, the bank
might see some slippages or may go for restructuring going forward. As far as the exposure to Telecom
players is concerned, the management has indicated that the total exposure to the telecom players is ~11% of
the total loan book i.e ~`35 bn. Out of these 5% of the loans (i.e. `15 bn) are given for 2G spectrum and is
largely given to large players with strong parent backing. Thus we do not foresee any significant slippages
going forward. We expect GNPA and NNPA to be around 0.53% and 0.12% respectively by FY13E.
For the quarter ended September 30, 2010, gross NPA as a percent of gross advances stood at 0.22%,
whereas, net NPA as a percent of net advances stood at 0.06%. The company has also seen a slight decline
in its restructured portfolio during Q2 FY11. Restructured advances as a percentage of loans are at 0.23%
which is amongst the lowest in the sector. Total NPL coverage ratio including general provisions is at 299%
as of Q2 FY11, whereas specific loan loss coverage ratio stood at 74.7%. Going forward, with near zero
unsecured SME lending and major focus on large corporate, the asset quality is expected to remain strong.
Well Capitalized to support its aggressive growth plans – Yes Bank is well capitalized with a Capital
Adequacy Ratio (CAR) of 19.4% as on September 30, 2010. Of this, Tier I Capital accounted for 11.0% as
against 9.4% as at September 30, 2009. In Q2 FY11 the bank has successfully raised over `11.7 bn through
Upper (`6.4 bn) as well as Lower Tier II (`3.1 bn), and Tier I Perpetual Bonds (`2.25 bn). Yes Bank’s ability to
raise capital at premium valuation at regular interval bodes well for its future growth. We believe, given the
scorching pace of growth in wholesale loan book, the bank may go for capital raising over the next 12 months.
The bank still has headroom of raising ~`4 bn capital from Tier II at this point in time. With such a strong
capital base, Yes bank is all set to support its growth plans going forward.
Robust business growth to continue – Growth in Retail and SMEs segment to be the next major focus
area – Yes Bank has seen strong traction in its business growth in the current fiscal year with advances and
deposits registering a growth of 86.3% and 106.6% YoY, respectively, as on September 30, 2010. Yes Bank’s
loan growth has been largely driven by the corporate segment where the bank focuses on key growth sectors
such as Food and Agriculture, Healthcare & Life Sciences, Media and Entertainment, Light Engineering,
Telecommunications, Information Technology, Infrastructure and Retailing amongst others. These sectors
constitute approximately 80.3% of the total advances as on September 30, 2010 (as can be seen from the
graph below). The Banks knowledge based lending to these sectors provides a competitive edge over its
peers. The knowledge capabilities and sectoral expertise of the team has enabled the bank to capture
significant market share and to bring sustainability in its revenue. During the current fiscal, strong demand for
funds from the telecom sector for 3G funding has also helped the bank in registering robust credit growth. Yes
Bank's advances are primarily into the corporate segment (corporate & institutional business) which accounts
for ~69.8% of the total advance book. Loans to mid corporates (commercial banking) and branch banking
(constituting both SMEs and Retail) accounts for 19.6% and ~10.6% of the portfolio, respectively. Going
forward, the management has indicated that the bank will increasingly focus on building SME and Retail loan
portfolio and expects the commercial and branch banking portfolio to increase to 30% each by FY15E.
Recently, the bank has raised $25 mn from US-based Wells Fargo Bank to be used exclusively for lending in
the SME segment.
Going ahead, as retail banking gains momentum, the bank will be able to focus on enhancing its yield on
assets (yield from retail assets is higher) and contain its cost of funds (with accesses to CASA deposits) which
will in turn stabilize its net margins. Going forward, we expect a CAGR growth of 43.7% and 46.0% in
advances and deposits for FY10-13E for the bank on the back of its growing focus towards branch banking,
improving credit growth and aggressive branch expansion plans.
Margins to get slightly impacted led by rising wholesale deposit rates, however, increase in CASA,
ability to pass on additional cost burden and re-pricing of assets will provide some support to the
margins going forward – Yes Bank is primarily funded by wholesale sources with CASA ratio of only 10.1%
as on September 30, 2010, which puts it at a disadvantage. Though we expect the share of CASA to increase
from 10.5% in FY10 to 15.3% in FY13E led by rapid branch expansion, the bank would still be heavily
dependent on wholesale funding. Recently, the wholesale deposit rate shot up very sharply (as can be seen
from the graph below) led by acute liquidity shortage in the banking system. The average borrowing by the
banks through the RBI’s repo window over the last two months has been ~ `1000 bn, reflecting the extent of
the shortage. However, we believe the liquidity situation to improve in Q4 mainly driven by higher government
spending, redemption of bonds and improvement in deposit mobilisation (as a result of aggressive deposit
rate hike by banks).
Although, Yes Bank is highly vulnerable to high wholesale deposit rates, however, we believe the bank’s
focus to increase its CASA deposit, ability to pass on the increased cost to the borrowers and well matched
ALM will come to its rescue. Yes bank is favorably placed in the rising interest rate scenario due to negative
asset liability duration with average asset duration of 17 months against average liability duration of 19
months. The management has indicated that around 95% of the bank’s total loan book is either linked to
prime lending rate or base rate or are less than one year in residual maturity. Consequently, re-pricing of
these assets over the next one year will absorb the increase in the cost of funds. On the liability side, with the
bank’s focus to expand its geographical reach in the liability rich north-western part of the country, CASA ratio
should gradually improve going forward thus providing some support to net interest margin. Added to this,
historically the bank has exhibited its strong ability to pass on the increased cost to the borrowers (as can be
seen from the graph below) because of the competitive advantage it has over the peer group in terms of
knowledge banking.
Core business supported by sustainable and diversified non-interest income – Non-Interest Income has
remained a major thrust area for the bank. The substantial contribution of non interest income to total net
income reflects the diversified revenue base of Yes Bank. Since its inception, non interest income contributed
on an average ~50% to its total net income. The robust growth in other income (CAGR growth of 99.6% over
FY05-10 although on a lower base) has helped the bank to withstand the downturn when the core business
was slowing down and emerge strongly post financial crisis.
Non-interest income consists of revenue originating from sales of Foreign Exchange and Treasury Products,
managing Financial Advisory & Merchant Banking Transactions, distribution of third party products,
Transaction Banking and Trade Finance activities. We expect a CAGR of 17.9% (on higher base) in non
interest income over FY11-13E likely driven by sustainable transaction banking revenues, healthy pipeline of
advisory services and growing focus on third party distributions.
The Banks strategy to cross sell wide range of financial products and services by leveraging the existing client
relationships is likely to boost profits through fee and fund based income going forward. The Bank has
witnessed a strong growth in its revenue from transaction banking, financial advisory services and third party
distribution (as can be seen from the graph above) in the recent quarters. The Bank’s focus on branch
banking and its strategy to mobilize SME clients has helped the bank to garner a large chunk from its
transaction banking services. The revenue from transaction banking are recurring in nature and is likely to
provide some stability to the non interest income stream as revenue from financial markets is volatile and is
dependent on market conditions. The management has indicated that the bank is increasingly focusing on
increasing branch banking fees (third party distribution & others). With rapid branch expansion, the branch
banking fee is likely to contribute an increasing share in the overall non-interest income stream. On the
advisory front, the bank has seen notable improvement in loan syndication and investment banking activities.
With the medium to long term outlook on equity markets and macro-economic prospects remaining stable,
fees from various advisory services are expected to grow at a healthy pace.
Return Ratios remains attractive despite capital raising at regular intervals – Yes Bank enjoys one of
the highest return ratios among its peer group largely driven by high share of non interest income in total
income and better operational efficiency. Added to this, the Bank’s focus on certain key growth sectors
wherein it has developed significant domain expertise has enabled the bank to offer customized financial
products to its clients. This approach also helped the bank to cross sell non-credit products and generate
substantial fee based revenues leading to superior return ratios. For the quarter ended September 30, 2010
the bank had annualized RoAE of 20.9% and RoAA of 1.5%. The Bank has been able to maintain these high
return ratios despite testing times. Going forward with the capital raising initiative taken by the bank during the
current quarter coupled with aggressive expansion plans, the return ratios may come under pressure in the
very near term. However, the ratios will start improving once the bank gets the full benefit of the additional
capital infused.
Operating expense ratio to improve going forward despite aggressive branch expansion and
employee recruitment plans mainly led by robust Net Interest Income growth and technological upgradation
– Yes Bank has witnessed considerable improvement in its operating efficiency over past 3 years
with cost to income ratio falling to 36.7% in FY10 from a high of 52.9% in FY07. We expect C/I ratio to
improve further by ~296 bps to 33.7% by FY13E despite aggressive branch expansion and employee
recruitment plans mainly driven by robust Net Interest Income (NII) growth, aggressive investment made in
technological up-gradation and continuous improvement in employee and branch productivity. We expect NII
to grow at a CAGR of 43.6% over FY10-FY13E driven by robust loan growth (CAGR growth of 43.7%),
increase in CASA base led by aggressive branch expansion plans (leading to cost minimization) and healthy
yield on investments.
Peer Group Analysis
Yes Bank is competitively placed among its peers and we expect the bank to deliver healthy NII (CAGR
43.6% FY10-13E) and earnings growth (CAGR 33.3% FY10-13E) going forward. The stock currently quotes
at a slight discount to its peers (TTM P/ABV of 2.6x for Yes Bank vs. 2.8x for peer group). Considering the
bank’s strong growth prospects coupled with its strong asset quality and adequate capitalization, we believe
the stock deserves a premium valuation as compared to its peer group. The bank has outpaced its peer group
with a 64.8% CAGR in Net Interest Income over the last three years as against 35.5% for the peerset. The
CAGR growth in PAT for the same period stood at 63.4% as against 42.6% for the peerset.
Valuations
We estimate Yes Bank to report an EPS CAGR of 32.6% over FY10-FY13E driven by robust business growth,
lower credit costs and stable fee income. ABV is estimated to grow at 22.9% CAGR during the same period.
The bank’s strong asset quality, superior return ratios, strong asset growth and adequate capitalisation bodes
well for its future growth. Added to this, we believe the bank’s growing focus towards branch banking and
increasing low cost CASA deposits (led by rapid branch expansion) will lead to expansion in valuation
multiples going forward.
The stock currently trades at 1.5x FY13E ABV and 7.9x FY13E EPS which we believe is attractive. We
initiate coverage with a price target of `335.3/share, implying an upside of 28.9% from current levels. We
have assigned 80% weight to P/ABV and 20% weight to P/E methodology.
Price-to-adjusted-book – Using a single-stage Gordon growth model, we value the bank on a FY13E ROAE
of 21.2%, cost of equity of 13.0% and growth of 5.0%, and arrive at a fair value of `339.8/ share (multiple of
2.0x).
Price-to-earnings – Based on Price to Earning, Yes Bank is trading at a discount to its peers. On a targeted
P/E multiple of 9.7x on FY13E EPS of `32.8/share we arrive at a target price of `317.3/share. Our targeted
P/E multiple reflects 20% discount to the current average multiple of the peer group (because of weak liability
franchise in comparison to peer group) for FY13E.
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