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Yes Bank (YESB.BO)
High Macro Leverage, But Strong Execution Provides Stability
Reducing target price to Rs345, Maintain Buy — We reduce our EVA-based
target price for Yes Bank to Rs345, but maintain our Buy (1M) rating. Our revised
target price is benchmarked to 2.25x 1Yr Fwd P/BV (2.5x earlier) and
incorporates lower asset longer term spreads and higher expense ratios.
Vulnerable to the macro, but strong execution has managed risks well —
Yes Bank’s historically strong loan growth, mid-market exposure and sector
concentrations has raised risk perceptions on its asset quality. However,
management has managed these risks well so far and NPLs have remained low,
with strong coverage levels. Also its funding franchise is modest – 10% CASA
mix, high dependence on wholesale funding – but net interest margins has
remained largely stable and relatively high (close to 300bps) despite a
challenging funding environment. While Yes remains leveraged to the macro
(could remain a valuation overhang), we believe its longer term growth potential
is robust and could provide strong upside in a better macro environment.
Quant View: Unattractive — As per our quantitative methodology, Yes Bank
currently lies in the Unattractive quadrant of our Value-Momentum map with weak
momentum and weak value scores.
Yes Bank currently lies in the Unattractive quadrant of our Value-Momentum map
with weak momentum and weak value scores. The stock has moved from the
Glamour quadrant to the Unattractive quadrant in the past 3 months indicating a fall
in momentum along with valuations remaining weak. Compared to its peers in the
Banks sector, Yes Bank fares worse on the valuation metric and on the momentum
metric. On the other hand, compared to its peers in its home market of India, Yes
Bank fares better on the valuation metric and on the momentum metric.
From a macro perspective, Yes Bank has a high beta to the region so is likely to rise
(or fall) faster than the region. It is also likely to benefit from Small cap
outperformance, falling Commodity (ex-oil) prices, falling EM yields, and a weaker
US Dollar.
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 Rs345 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.
Valuation
We value Yes Bank at Rs345 per share based on our EVA model. Our key
assumptions are: a) longer-term spreads of 2.2%, slightly higher than industry
(average 2.0%); b) 8.0% risk-free rate – in line with our assumptions for other Indian
banks; and c) 38% longer-term cost-income ratio, slightly lower than peers. We also
benchmark our valuations at 2.25x 1yr Fwd PBV, translating into a fair value of
Rs335 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 mid-market 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 in-line with our quantitative risk-rating system,
which tracks 260-day historical share price volatility. 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)
High Macro Leverage, But Strong Execution Provides Stability
Reducing target price to Rs345, Maintain Buy — We reduce our EVA-based
target price for Yes Bank to Rs345, but maintain our Buy (1M) rating. Our revised
target price is benchmarked to 2.25x 1Yr Fwd P/BV (2.5x earlier) and
incorporates lower asset longer term spreads and higher expense ratios.
Vulnerable to the macro, but strong execution has managed risks well —
Yes Bank’s historically strong loan growth, mid-market exposure and sector
concentrations has raised risk perceptions on its asset quality. However,
management has managed these risks well so far and NPLs have remained low,
with strong coverage levels. Also its funding franchise is modest – 10% CASA
mix, high dependence on wholesale funding – but net interest margins has
remained largely stable and relatively high (close to 300bps) despite a
challenging funding environment. While Yes remains leveraged to the macro
(could remain a valuation overhang), we believe its longer term growth potential
is robust and could provide strong upside in a better macro environment.
Quant View: Unattractive — As per our quantitative methodology, Yes Bank
currently lies in the Unattractive quadrant of our Value-Momentum map with weak
momentum and weak value scores.
Yes Bank currently lies in the Unattractive quadrant of our Value-Momentum map
with weak momentum and weak value scores. The stock has moved from the
Glamour quadrant to the Unattractive quadrant in the past 3 months indicating a fall
in momentum along with valuations remaining weak. Compared to its peers in the
Banks sector, Yes Bank fares worse on the valuation metric and on the momentum
metric. On the other hand, compared to its peers in its home market of India, Yes
Bank fares better on the valuation metric and on the momentum metric.
From a macro perspective, Yes Bank has a high beta to the region so is likely to rise
(or fall) faster than the region. It is also likely to benefit from Small cap
outperformance, falling Commodity (ex-oil) prices, falling EM yields, and a weaker
US Dollar.
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 Rs345 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.
Valuation
We value Yes Bank at Rs345 per share based on our EVA model. Our key
assumptions are: a) longer-term spreads of 2.2%, slightly higher than industry
(average 2.0%); b) 8.0% risk-free rate – in line with our assumptions for other Indian
banks; and c) 38% longer-term cost-income ratio, slightly lower than peers. We also
benchmark our valuations at 2.25x 1yr Fwd PBV, translating into a fair value of
Rs335 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 mid-market 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 in-line with our quantitative risk-rating system,
which tracks 260-day historical share price volatility. 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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