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Yes Bank (YESB.BO)
1Q12 Results: Healthy Earnings, Balanced on Growth, NIMs
Raising target price, maintain Buy; Potential risks, but also higher returns — We
are raising our EVA-based target price to Rs380, benchmarked off 2.5x 1Yr Fwd P/BV
(Sep’12). While its higher historical growth, mid-market exposure and wholesale
funding raise risks on growth, asset quality and NIMs – we believe management has
managed these risks quite well so far. Yes is a relatively leveraged play on the
economy – downside risks remain higher than larger peers, but so do potential returns,
especially if economic concerns ease. Maintain Buy (1M).
1Q12 profits up 38%, slightly above our estimates — Yes Bank’s 1Q12 earnings
growth was healthy (+38% yoy) and driven by – a) Stable NIMs qoq, despite a
challenging rate environment; and b) Reduction in credit costs. There were offsets –
loan growth moderated sharply (-4% qoq) and pace of fee growth also declined (+16%
yoy). Overall, the quarter required a fine balance between growth and margins – we
believe well achieved, though tilted slightly more towards protecting NIMs.
P&L: Stable NIMs (positive surprise), modest fees, low credit costs — Yes Bank’s
a) NIMs remained at 280bps, despite its largely wholesale funding and a flat yield curve
- attributed mostly to matching asset-liability durations; b) Fee income growth
moderated (+16% yoy) – though it did have a silver lining – strong uptick in retail fee
(+45% yoy); c) Cost/income ratio was slightly higher at 37%, we expect stabilization
here; and d) Credit costs declined sharply on a one-time write-back (Rs150m in 1Q12),
should normalize going ahead. In sum, a potentially tricky quarter, but well negotiated.
Balance sheet: Growth moderation but no let-up in quality — Yes Bank’s a) Loan
growth declined sharply to 26% yoy (down 4% qoq) and suggests impact of higher loan
yields showing through (we reduce loan growth to 30% for FY12); b) Funding remains
a challenge – CASA ratio remained low (10.9%) despite sequential deposit de-growth;
c) Asset quality however remained strong, NPLs at 0.2% and total coverage levels of
400% are the best in the industry; and d) Capital remains comfortable for now – 10.1%
Tier 1, suggests no immediate need for capital, provides cushion on timing, valuations
Yes Bank
Company description
Yes Bank was started in FY05 by Mr. Rana Kapoor and is the newest private-sector
bank in India. It has grown rapidly since inception and what it lacks in size it makes
up with strong growth, quality management, and a rapidly building franchise. The
bank has 255 branches and management suggests a target of over 500 branches
by FY15. In FY11, the bank grew its loans by 55% to Rs343bn and net profits by
52% to Rs7.3bn.
Investment strategy
We rate Yes Bank Buy/Medium Risk (1M) with an EVA-based Rs380 target price.
Yes Bank has shown aggressive growth, strong execution skills, a focused asset
portfolio, strong treasury and advisory income businesses with relatively low NPLs
so far. Yes Bank is highly leveraged to a strong economy with its consistently high
growth and strong quality. Yes has shown little evidence of longer-term asset quality
concerns despite a challenging asset quality environment and its own relatively
concentrated mid-market exposure. We believe a stable/rising economic growth
environment, low interest/easing liquidity regime, and strong capital markets are key
ingredients to support Yes Bank. Our Buy rating on Yes Bank is based on: a) its
relatively higher loan growth outlook; b) strong asset quality track record with low
NPLs and high coverage levels; and c) NIM stability despite its wholesale funded
balance sheet due to strong asset-liability management.
Valuation
We value Yes Bank at Rs380 per share based on our EVA model. Our key
assumptions are: a) longer-term spreads of 1.8%, slightly lower than most peers
(industry average 2.0%) given its structurally lower spreads; b) 8.0% risk-free rate –
in line with our assumptions for other Indian banks; and c) 35% longer-term costincome ratio, slightly lower than peers. We also benchmark our valuations at 2.5x
1yr Fwd PBV, translating into a fair value of Rs372 per share. Our benchmark PBV
multiple for Yes Bank is at a 10-30% discount to best-of-breed private banks like
Axis and HDFC Bank, reflecting its much weaker liability franchise and a more midmarket asset exposure. However, if liquidity eases meaningfully and loan growth
improves, Yes Bank can also trade at premiums to peers given its smaller size and
greater ability to access and leverage incremental capital quickly. We prefer to value
banks on the EVA model as we believe it better captures the longer-term value of
the business, and is in line with our approach to valuing other banks in the sector.
Risks
We rate Yes Bank Medium Risk despite the Low Risk suggested by our quantitative
risk-rating system, which tracks 260-day historical share price volatility. We use a
higher risk rating (Medium) due to Yes Bank's high leverage to the economic growth
and asset quality improvement cycle. Key downside risks which could prevent the
stock from reaching our target price include: a) any further deterioration in the
macro economic environment; b) sharp deterioration in asset quality environment;
c) weaker than expected capital markets given its relatively high proportion of fees
from related activities; and d) further tightening of liquidity and interest rate
environment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Yes Bank (YESB.BO)
1Q12 Results: Healthy Earnings, Balanced on Growth, NIMs
Raising target price, maintain Buy; Potential risks, but also higher returns — We
are raising our EVA-based target price to Rs380, benchmarked off 2.5x 1Yr Fwd P/BV
(Sep’12). While its higher historical growth, mid-market exposure and wholesale
funding raise risks on growth, asset quality and NIMs – we believe management has
managed these risks quite well so far. Yes is a relatively leveraged play on the
economy – downside risks remain higher than larger peers, but so do potential returns,
especially if economic concerns ease. Maintain Buy (1M).
1Q12 profits up 38%, slightly above our estimates — Yes Bank’s 1Q12 earnings
growth was healthy (+38% yoy) and driven by – a) Stable NIMs qoq, despite a
challenging rate environment; and b) Reduction in credit costs. There were offsets –
loan growth moderated sharply (-4% qoq) and pace of fee growth also declined (+16%
yoy). Overall, the quarter required a fine balance between growth and margins – we
believe well achieved, though tilted slightly more towards protecting NIMs.
P&L: Stable NIMs (positive surprise), modest fees, low credit costs — Yes Bank’s
a) NIMs remained at 280bps, despite its largely wholesale funding and a flat yield curve
- attributed mostly to matching asset-liability durations; b) Fee income growth
moderated (+16% yoy) – though it did have a silver lining – strong uptick in retail fee
(+45% yoy); c) Cost/income ratio was slightly higher at 37%, we expect stabilization
here; and d) Credit costs declined sharply on a one-time write-back (Rs150m in 1Q12),
should normalize going ahead. In sum, a potentially tricky quarter, but well negotiated.
Balance sheet: Growth moderation but no let-up in quality — Yes Bank’s a) Loan
growth declined sharply to 26% yoy (down 4% qoq) and suggests impact of higher loan
yields showing through (we reduce loan growth to 30% for FY12); b) Funding remains
a challenge – CASA ratio remained low (10.9%) despite sequential deposit de-growth;
c) Asset quality however remained strong, NPLs at 0.2% and total coverage levels of
400% are the best in the industry; and d) Capital remains comfortable for now – 10.1%
Tier 1, suggests no immediate need for capital, provides cushion on timing, valuations
Yes Bank
Company description
Yes Bank was started in FY05 by Mr. Rana Kapoor and is the newest private-sector
bank in India. It has grown rapidly since inception and what it lacks in size it makes
up with strong growth, quality management, and a rapidly building franchise. The
bank has 255 branches and management suggests a target of over 500 branches
by FY15. In FY11, the bank grew its loans by 55% to Rs343bn and net profits by
52% to Rs7.3bn.
Investment strategy
We rate Yes Bank Buy/Medium Risk (1M) with an EVA-based Rs380 target price.
Yes Bank has shown aggressive growth, strong execution skills, a focused asset
portfolio, strong treasury and advisory income businesses with relatively low NPLs
so far. Yes Bank is highly leveraged to a strong economy with its consistently high
growth and strong quality. Yes has shown little evidence of longer-term asset quality
concerns despite a challenging asset quality environment and its own relatively
concentrated mid-market exposure. We believe a stable/rising economic growth
environment, low interest/easing liquidity regime, and strong capital markets are key
ingredients to support Yes Bank. Our Buy rating on Yes Bank is based on: a) its
relatively higher loan growth outlook; b) strong asset quality track record with low
NPLs and high coverage levels; and c) NIM stability despite its wholesale funded
balance sheet due to strong asset-liability management.
Valuation
We value Yes Bank at Rs380 per share based on our EVA model. Our key
assumptions are: a) longer-term spreads of 1.8%, slightly lower than most peers
(industry average 2.0%) given its structurally lower spreads; b) 8.0% risk-free rate –
in line with our assumptions for other Indian banks; and c) 35% longer-term costincome ratio, slightly lower than peers. We also benchmark our valuations at 2.5x
1yr Fwd PBV, translating into a fair value of Rs372 per share. Our benchmark PBV
multiple for Yes Bank is at a 10-30% discount to best-of-breed private banks like
Axis and HDFC Bank, reflecting its much weaker liability franchise and a more midmarket asset exposure. However, if liquidity eases meaningfully and loan growth
improves, Yes Bank can also trade at premiums to peers given its smaller size and
greater ability to access and leverage incremental capital quickly. We prefer to value
banks on the EVA model as we believe it better captures the longer-term value of
the business, and is in line with our approach to valuing other banks in the sector.
Risks
We rate Yes Bank Medium Risk despite the Low Risk suggested by our quantitative
risk-rating system, which tracks 260-day historical share price volatility. We use a
higher risk rating (Medium) due to Yes Bank's high leverage to the economic growth
and asset quality improvement cycle. Key downside risks which could prevent the
stock from reaching our target price include: a) any further deterioration in the
macro economic environment; b) sharp deterioration in asset quality environment;
c) weaker than expected capital markets given its relatively high proportion of fees
from related activities; and d) further tightening of liquidity and interest rate
environment.
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