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Yes Bank
Overweight
YESB.BO, YES IN
Strong 4Q addresses margin concerns
• Better-than-expected 4Q FY11: Yes bank reported 4Q FY11 PAT of
Rs2.03B, up 45% y/y, 6% above JPMe. The profit beat was mainly on
margins (~5bp surprise) and loan growth (4% ahead of JPMe). The fact
that margins held up sequentially was a positive surprise. Also, credit
costs remained low (~50bp) in spite of a significant PCR increase.
• Loan growth strong, strong sequential pickup in fee income: Loan
growth was very robust, with ~11% q/q growth. Fee growth picked up,
with 16% q/q growth driven by advisory and transaction banking.
Management expects loan growth to moderate from the current level as
system growth slows, but maintains guidance of 2x system growth. We
factor in ~38% growth in advances in FY12.
• Margins holding up well: Margins were flat q/q at 2.8%, with lending
rate rises netting off funding costs pressures. This is positive, given the
liquidity tightness in 2H FY11, and we believe it addresses street
concerns about margins. Absolute CASA growth was strong at 18% q/q
but strong deposit growth masked CASA % improvement. In view of the
liquidity situation improving, lending rate increases, and higher CASA
ratio, we forecast ~15bp NIM improvement over FY11-13.
• Credit costs remained low: NPL provisions were 40% over JPMe, but
that was a balance-sheet strengthening measure, with coverage jumping
from 76% to 88% over the quarter. Delinquencies decreased to
Rs500MM in FY11 from Rs1.13B in FY10 with >50% loan growth. We
factor in ~80bp of credit costs in FY12 (<40bp in FY11), and sustenance
of lower credit costs could lead to a large earnings surprise.
• Maintain Overweight; raise Mar-12 PT to Rs380: We increase our
earnings estimates by 3-4%, driven by higher loan growth and lower
opex base in FY11, and raise our Gordon-growth-model-based Mar-12
PT to Rs380 (from Rs350). In view of the high ROE (>20%) and strong
earnings growth (+40% in FY12E), we believe a >20% book discount to
peers is excessive, and thus maintain our OW recommendation.
Loan growth beat forecasts: Loan growth was strong at 10.5% q/q and up 55% y/y
– a 4% surprise. Management expects system loan growth to moderate to 16-17%
and maintains guidance of 2x system loan growth for Yes Bank. We believe loan
growth will moderate from the current level given a higher base impact and
moderation in system growth, but expect ~35-40% growth driven by SME/Micro
SMEs segments. Retail credit could remain a minor proportion of overall loan
growth over the next two years as Yes Bank continues to build on its liability
franchise.
Low fee-income growth due to high base effect: Fee income growth was low at 17
y/y due to high base impact. Sequential fee income growth was strong at 16% q/q
driven by strong improvement in advisory and transaction banking.
Margins held up well: Margins were flat q/q at 2.8% (JPMe: ~5bp contraction).
This belies market concerns that its ~90% wholesale funding mix makes it vulnerable
to the tight liquidity spell seen in 2H FY11. The macro has now improved with
liquidity easing – margins should head northward now. Yes Bank has taken a ~50bp
lending rake rise in April and this should aid a margin recovery in the near term.
CASA ratio was up marginally (10bp q/q to 10.3%) but absolute CASA momentum
was strong with 18% q/q growth. With moderation in the overall balance sheet
growth and continued momentum in CASA driven by aggressive branch expansion,
we expect CASA ratios to improve in FY12.
Credit costs remain low: NPL provisions were 40% over JPMe but that was a
balance-sheet strengthening measure with coverage jumping from 76% to 88% over
the quarter. Even with the miss, credit costs remained low at ~53bp. Overall credit
costs were relatively low in FY11 at <40bp, in spite of the increase in provision
coverage. Though some of part of the low credit costs is due to the higher growth,
improving asset quality helped. We factor in ~80bp credit cost for FY12, and we
believe this adequately factor in any slippages from the MFI book (Rs2.5B
exposure).
Capital issue: The board has approved up to US$500MM in capital issue with the
issue expected the 2H FY12. This is not a surprise – we have factored an Rs15B
($330MM) equity issuance in FY12. With tier-1 at 9.7% and 2x loan growth targets,
a capital-raising is necessary.
Maintain Overweight, raise PT to Rs380
We increase our earnings estimates by 4-5% driven by higher loan growth and lower
opex base in FY11, and raise our Gordon-growth-based Mar-12 PT to Rs380 (from
Rs350 earlier). We factor in Rs15B dilution for FY12 at Rs250/share and, given the
current price of Rs330/share, lower dilution could impact EPS positively.
In view of the high ROE (>20%) and strong earnings growth (+40% in FY12E), we
believe a >20% book discount to peers is excessive, and thus maintain our OW
recommendation. Improvement in CASA and sustenance of lower credit costs should
be strong catalysts. Key risks are (1) execution of the retail rollout, given the bank’s
wholesale DNA and the need for brand-building, and b) capital-raising strategy
exposes growth to stock market cycles.
Figure 8: Yes Bank: Increase PT to Rs380
Risk free rate: 8.0%
Market risk premium: 6.0%
Beta: 1.15
Cost of Equity 14.9%
Terminal “g”: 5.0%
Price target 380
Normalized ROE
NIM/Assets 2.8%
Non- interest income/assets 1.5%
Revenues/Assets 4.3%
Costs/Assets -1.5%
Provisions/Assets -0.6%
Taxes/Assets -0.8%
ROA 1.5%
ROE 18.3%
Source: J.P.Morgan estimates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Yes Bank
Overweight
YESB.BO, YES IN
Strong 4Q addresses margin concerns
• Better-than-expected 4Q FY11: Yes bank reported 4Q FY11 PAT of
Rs2.03B, up 45% y/y, 6% above JPMe. The profit beat was mainly on
margins (~5bp surprise) and loan growth (4% ahead of JPMe). The fact
that margins held up sequentially was a positive surprise. Also, credit
costs remained low (~50bp) in spite of a significant PCR increase.
• Loan growth strong, strong sequential pickup in fee income: Loan
growth was very robust, with ~11% q/q growth. Fee growth picked up,
with 16% q/q growth driven by advisory and transaction banking.
Management expects loan growth to moderate from the current level as
system growth slows, but maintains guidance of 2x system growth. We
factor in ~38% growth in advances in FY12.
• Margins holding up well: Margins were flat q/q at 2.8%, with lending
rate rises netting off funding costs pressures. This is positive, given the
liquidity tightness in 2H FY11, and we believe it addresses street
concerns about margins. Absolute CASA growth was strong at 18% q/q
but strong deposit growth masked CASA % improvement. In view of the
liquidity situation improving, lending rate increases, and higher CASA
ratio, we forecast ~15bp NIM improvement over FY11-13.
• Credit costs remained low: NPL provisions were 40% over JPMe, but
that was a balance-sheet strengthening measure, with coverage jumping
from 76% to 88% over the quarter. Delinquencies decreased to
Rs500MM in FY11 from Rs1.13B in FY10 with >50% loan growth. We
factor in ~80bp of credit costs in FY12 (<40bp in FY11), and sustenance
of lower credit costs could lead to a large earnings surprise.
• Maintain Overweight; raise Mar-12 PT to Rs380: We increase our
earnings estimates by 3-4%, driven by higher loan growth and lower
opex base in FY11, and raise our Gordon-growth-model-based Mar-12
PT to Rs380 (from Rs350). In view of the high ROE (>20%) and strong
earnings growth (+40% in FY12E), we believe a >20% book discount to
peers is excessive, and thus maintain our OW recommendation.
Loan growth beat forecasts: Loan growth was strong at 10.5% q/q and up 55% y/y
– a 4% surprise. Management expects system loan growth to moderate to 16-17%
and maintains guidance of 2x system loan growth for Yes Bank. We believe loan
growth will moderate from the current level given a higher base impact and
moderation in system growth, but expect ~35-40% growth driven by SME/Micro
SMEs segments. Retail credit could remain a minor proportion of overall loan
growth over the next two years as Yes Bank continues to build on its liability
franchise.
Low fee-income growth due to high base effect: Fee income growth was low at 17
y/y due to high base impact. Sequential fee income growth was strong at 16% q/q
driven by strong improvement in advisory and transaction banking.
Margins held up well: Margins were flat q/q at 2.8% (JPMe: ~5bp contraction).
This belies market concerns that its ~90% wholesale funding mix makes it vulnerable
to the tight liquidity spell seen in 2H FY11. The macro has now improved with
liquidity easing – margins should head northward now. Yes Bank has taken a ~50bp
lending rake rise in April and this should aid a margin recovery in the near term.
CASA ratio was up marginally (10bp q/q to 10.3%) but absolute CASA momentum
was strong with 18% q/q growth. With moderation in the overall balance sheet
growth and continued momentum in CASA driven by aggressive branch expansion,
we expect CASA ratios to improve in FY12.
Credit costs remain low: NPL provisions were 40% over JPMe but that was a
balance-sheet strengthening measure with coverage jumping from 76% to 88% over
the quarter. Even with the miss, credit costs remained low at ~53bp. Overall credit
costs were relatively low in FY11 at <40bp, in spite of the increase in provision
coverage. Though some of part of the low credit costs is due to the higher growth,
improving asset quality helped. We factor in ~80bp credit cost for FY12, and we
believe this adequately factor in any slippages from the MFI book (Rs2.5B
exposure).
Capital issue: The board has approved up to US$500MM in capital issue with the
issue expected the 2H FY12. This is not a surprise – we have factored an Rs15B
($330MM) equity issuance in FY12. With tier-1 at 9.7% and 2x loan growth targets,
a capital-raising is necessary.
Maintain Overweight, raise PT to Rs380
We increase our earnings estimates by 4-5% driven by higher loan growth and lower
opex base in FY11, and raise our Gordon-growth-based Mar-12 PT to Rs380 (from
Rs350 earlier). We factor in Rs15B dilution for FY12 at Rs250/share and, given the
current price of Rs330/share, lower dilution could impact EPS positively.
In view of the high ROE (>20%) and strong earnings growth (+40% in FY12E), we
believe a >20% book discount to peers is excessive, and thus maintain our OW
recommendation. Improvement in CASA and sustenance of lower credit costs should
be strong catalysts. Key risks are (1) execution of the retail rollout, given the bank’s
wholesale DNA and the need for brand-building, and b) capital-raising strategy
exposes growth to stock market cycles.
Figure 8: Yes Bank: Increase PT to Rs380
Risk free rate: 8.0%
Market risk premium: 6.0%
Beta: 1.15
Cost of Equity 14.9%
Terminal “g”: 5.0%
Price target 380
Normalized ROE
NIM/Assets 2.8%
Non- interest income/assets 1.5%
Revenues/Assets 4.3%
Costs/Assets -1.5%
Provisions/Assets -0.6%
Taxes/Assets -0.8%
ROA 1.5%
ROE 18.3%
Source: J.P.Morgan estimates
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