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Yes Bank
Switch from ‘Sell’ to ‘Buy’
Yes Bank (‘YES’) has underperformed the benchmark BSE Bankex by
11% since our Dec’09 ‘Sell’ initiation despite consensus beating
earnings and growth. The stock now trades at 2.4x FY12E BV, a sharp
15% discount to its private sector peers. However, we turn buyers of
the stock on the back of its now sensible discount to stronger low
cost private sector deposit franchises and its renewed commitment
on building a retail deposit led franchise.
Yes bank has underperformed since our initiation...
YES’s underperformance has been led by: (a) bank falling short of its ‘version
2.0 guidance’ on branch scale up (the bank had guided to an annual branch run
rate of 150 till 2015) and low cost deposits’ contribution (guided to rise ~500bps
each year until 2015 from the current 10.5%), (b) negligible progress in the
bank’s low cost current and savings ‘CASA’ deposit base which exposes it to
near term NIM pressure as the interest rate cycle turns north; and (c) the bank’s
outsized exposure to the microfinance crisis vs. peers (1.5% of loans vs. 80bps
for private sector peers).
...despite strong earnings growth
Recent quarters had seen YES delivering stellar growth and earnings
performance. For the 9MFY11 period, the bank’s loan book and net profit grew
66% and 55% YoY. While earnings growth had exceeded consensus (and our)
expectations, investors in the stock have been disappointed by the bank’s
inability to grow its low cost deposit base (stagnant at 10.2% of deposits as on
Dec’11). With the rising interest rate cycle putting higher pressure on the bank’s
funding costs (rose from 6.3% in Q1FY11 to 7.1% in Q3FY11) net interest margins
had fallen to 2.8% in Q3FY11 (3.1% in Q1FY11).
Buy call driven by undemanding valuation and revival of
‘CASA’ focus
We turn Buyers of YES on the back of (a) Sensible valuations – currently trading
at a 15% discount to peers and 25% discount to its historical average; and (b) pick
up in branch addition – Yes bank has increased the number of branch additions
Q2, Q3 andQ4 of FY11 to 18, 14 and 15 respectively, which is significantly above
the mere 3 branches it had added in the first quarter of its retail banking launch in
Q1FY11. Its FY11 branch runrate of 50 is above the 27, 50 and 33 branches it had
added in FY07, FY08 and FY09 respectively.
Based on our analysis of other successful private banks, we believe that YES’
niche in corporate lending should help it building a successful franchise if it
simultaneously also invests in a brick and mortar branch network (sticking to ver.
2.0 targets should help). The bank will also need to hasten its retail launch before
competition picks up in a material fashion with the likely entry of a new wave of
private banks in 2012.
Risks to our ‘Buy’ call
(a) Low traction in low cost ‘CASA’ deposits’ with rising competitive pressure
and; (b) Aggressive branch expansion plans and higher than expected retail
delinquencies depressing RoEs.
Undemanding valuations
At yesterday’s closing price of Rs 330, Yes Bank trades at 2.1x FY13E BV (15%
discount on FY12E BV to private peers). With the stock now trading at a sensible
discount to its larger CASA peers and with an improved commitment in recent
quarters on branch expansion, we switch from a ‘Sell’ to a ‘Buy’ with a revised
fair value of Rs 386, 17% upside and an implied FY13E P/BV of 2.4x.
Company snapshot
Yes Bank is India’s newest bank founded by Grindlays bankers Mr. Rana Kapoor &
late Mr. Ashok Kapur (31.3% holding) and Netherland based Rabo Bank (13.4%) in
2005. With an asset size of $11.6bn, Yes Bank has a corporate lending dominated
loan book (large and mid corporate loans account for 93% of the banks’ $7.0bn loan
book) funded by a largely institutional funding base (wholesale deposits at 74% of
the banks’ $8.8bn deposit book).
PAT growth at a CAGR of 71% between FY06-10 has been sustained by a superior
income mix v/s conventional banking peers (‘non-interest income’ contributed to
42% of the income in FY’10 with core fee income contributing to 28% of total
income), modest operating and credit costs in a largely unseasoned loan book. The
bank had 200 branches as on Mar’11 and is targeting to increase these to 250
branches by Jun’11.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Yes Bank
Switch from ‘Sell’ to ‘Buy’
Yes Bank (‘YES’) has underperformed the benchmark BSE Bankex by
11% since our Dec’09 ‘Sell’ initiation despite consensus beating
earnings and growth. The stock now trades at 2.4x FY12E BV, a sharp
15% discount to its private sector peers. However, we turn buyers of
the stock on the back of its now sensible discount to stronger low
cost private sector deposit franchises and its renewed commitment
on building a retail deposit led franchise.
Yes bank has underperformed since our initiation...
YES’s underperformance has been led by: (a) bank falling short of its ‘version
2.0 guidance’ on branch scale up (the bank had guided to an annual branch run
rate of 150 till 2015) and low cost deposits’ contribution (guided to rise ~500bps
each year until 2015 from the current 10.5%), (b) negligible progress in the
bank’s low cost current and savings ‘CASA’ deposit base which exposes it to
near term NIM pressure as the interest rate cycle turns north; and (c) the bank’s
outsized exposure to the microfinance crisis vs. peers (1.5% of loans vs. 80bps
for private sector peers).
...despite strong earnings growth
Recent quarters had seen YES delivering stellar growth and earnings
performance. For the 9MFY11 period, the bank’s loan book and net profit grew
66% and 55% YoY. While earnings growth had exceeded consensus (and our)
expectations, investors in the stock have been disappointed by the bank’s
inability to grow its low cost deposit base (stagnant at 10.2% of deposits as on
Dec’11). With the rising interest rate cycle putting higher pressure on the bank’s
funding costs (rose from 6.3% in Q1FY11 to 7.1% in Q3FY11) net interest margins
had fallen to 2.8% in Q3FY11 (3.1% in Q1FY11).
Buy call driven by undemanding valuation and revival of
‘CASA’ focus
We turn Buyers of YES on the back of (a) Sensible valuations – currently trading
at a 15% discount to peers and 25% discount to its historical average; and (b) pick
up in branch addition – Yes bank has increased the number of branch additions
Q2, Q3 andQ4 of FY11 to 18, 14 and 15 respectively, which is significantly above
the mere 3 branches it had added in the first quarter of its retail banking launch in
Q1FY11. Its FY11 branch runrate of 50 is above the 27, 50 and 33 branches it had
added in FY07, FY08 and FY09 respectively.
Based on our analysis of other successful private banks, we believe that YES’
niche in corporate lending should help it building a successful franchise if it
simultaneously also invests in a brick and mortar branch network (sticking to ver.
2.0 targets should help). The bank will also need to hasten its retail launch before
competition picks up in a material fashion with the likely entry of a new wave of
private banks in 2012.
Risks to our ‘Buy’ call
(a) Low traction in low cost ‘CASA’ deposits’ with rising competitive pressure
and; (b) Aggressive branch expansion plans and higher than expected retail
delinquencies depressing RoEs.
Undemanding valuations
At yesterday’s closing price of Rs 330, Yes Bank trades at 2.1x FY13E BV (15%
discount on FY12E BV to private peers). With the stock now trading at a sensible
discount to its larger CASA peers and with an improved commitment in recent
quarters on branch expansion, we switch from a ‘Sell’ to a ‘Buy’ with a revised
fair value of Rs 386, 17% upside and an implied FY13E P/BV of 2.4x.
Company snapshot
Yes Bank is India’s newest bank founded by Grindlays bankers Mr. Rana Kapoor &
late Mr. Ashok Kapur (31.3% holding) and Netherland based Rabo Bank (13.4%) in
2005. With an asset size of $11.6bn, Yes Bank has a corporate lending dominated
loan book (large and mid corporate loans account for 93% of the banks’ $7.0bn loan
book) funded by a largely institutional funding base (wholesale deposits at 74% of
the banks’ $8.8bn deposit book).
PAT growth at a CAGR of 71% between FY06-10 has been sustained by a superior
income mix v/s conventional banking peers (‘non-interest income’ contributed to
42% of the income in FY’10 with core fee income contributing to 28% of total
income), modest operating and credit costs in a largely unseasoned loan book. The
bank had 200 branches as on Mar’11 and is targeting to increase these to 250
branches by Jun’11.
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