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YES Bank (YES)
Banks/Financial Institutions
Holding fort in the current environment. Yes Bank reported 33% earnings growth
driven by moderate NIM expansion (10 bps) and healthy non-interest income—earnings
impressive despite a high interest rate environment that is difficult for the bank’s
operating environment. Fee income was driven by capital market activities and core
transaction banking. Asset quality trends have been strong with negligible slippages
while restructured loans increased primarily from MFIs. The bank is currently trading at
2.2X book and 11X FY2012E EPS for 20% RoEs and EPS growth of about 25% CAGR
for FY2011-13E. Retain BUY and TP of `420.
High interest impacts growth while fee income contribution showed improvement; maintain BUY
Yes Bank’s earnings (33% yoy) were driven by healthy revenue growth (35% yoy) led by strong
contribution from margin expansion (10 bps), capital market-related businesses and core
transaction banking. Cost of funds remains high at 8.6% implying a negative return in its SLR
portfolio and making it difficult to grow balance sheet (21% yoy) at current NIMs. We see growth
delayed by a few quarters till interest rates cools off from current levels. Fee income has been
impressive but the quarter saw a few one-off large transactions in capital markets (debt-related)
driving performance—unlikely to be repeated given market conditions but we expect core
transaction banking fees to drive overall non-interest income.
Weak CASA deposit mobilization remains a key disappointment (2% qoq and 20% yoy). CASA
ratio is flat qoq at 11% and recent branch expansion is yet to make meaningful contribution to
overall CASA deposits. We have broadly maintained our estimates (increased credit costs to factor
the current environment) and note that the low interest rate environment conducive for wholesale
business models like that of Yes Bank. Retain BUY and target of `420 valuing the bank at 2.6X
FY2013E book and 13X EPS. We expect Yes Bank to outperform the broader market as interest
rates soften from current levels.
NIMs improve 10 bps to 2.9%; high cost of funds implies negative yields on SLR
NIMs for the quarter improved by 10 bps to 2.9% on the back of shift in the composition of assets
and liabilities. The bank has shed some wholesale loans and sourced relatively low-cost borrowings
(including overseas funds) to manage its liabilities. Cost of funds remains high at 8.6%, implying
negative returns on SLR deposits. Overall loan yields remain high at 12.2%, one of the highest
among peers for an asset portfolio primarily in corporate segment.
We maintain our current NIM assumptions (20 bps decline in FY2012E but an improvement of
about 10 bps in FY2013E). The bank should see early benefits when interest rates decline as the
bank has a larger share of shorter duration liabilities (except capital funds).
Weak loan growth as credit substitutes take a higher share of growth
Yes Bank’s reported loan growth was weak at 13% yoy (3% qoq) as focus shifted to non-
SLR-related investments which grew sharply qoq (40% qoq). We believe that the increase in
lending through credit substitutes, primarily in the form of CP/bonds, looks opportunistic,
client-driven rather than choice. Expect sell-down from this portfolio as yields decline from
current levels and shift focus to loan growth.
Overall composition of loans changed marginally towards retail (includes portfolio/loans
buyouts) which is currently about 15% of loans (12% in June 2011). Large corporate houses
account for about 60% of loans while the mid-corporate segment is about 25% of loans.
Given the lumpiness in corporate loans and interest rates, we expect loan growth at 30%
CAGR for FY2011-13E.
Balance sheet growth supported by growth in borrowings and less on deposits
Overall deposits grew by 10% yoy (1% qoq) as compared to balance sheet growth of 21%
yoy growth as the bank looked at other windows to mobilize funds. The management
indicated that a combination of refinancing facilities from various domestic and international
markets was utilized over the past few quarters to mobilize marginally lower cost funds.
We note that the bank has accelerated the branch expansion which could probably result in
improvement in the liability franchise. The bank opened 50 branches (134 branches in the
past four quarters) taking the total branches to 305. However, while deposits from branches
have grown impressively (about 100% yoy), improving CASA ratio continues to remain a
struggle. CASA ratio is currently at 11% (flat qoq) despite weak deposit growth.
Fee income boosted from financial markets; transaction banking impressive
Yes Bank saw overall non-interest income grow 63% yoy primarily on the back of strong
business from debt underwriting (few large deals) and healthy growth in transaction
banking income. Consequently, fee income to assets improved to 1.4% having declined to a
low of 1.1% in June 2011. Performance on core transaction banking-related activities was
impressive (59% yoy). Financial markets (forex related) grew 20% while retail fees were flat.
Given the market conditions, we expect a more subdued performance in capital marketrelated
activities but expect healthy growth in core banking-related activities. We are
building fee income to grow by 25% CAGR for FY2011-13E.
Other highlights for the quarter
Asset quality continues to remain very healthy with gross NPLs at 0.2% and net NPLs
0.04% of loans. Slippages were negligible for the quarter (about 20 bps). Restructured
assets increased by `885 mn to `1.7 bn (0.5% of loans) as the bank restructured few MFI
accounts—classified as standard post CDR exercise. The bank has made an ad hoc
provisions of about `80 mn during the quarter in addition to specific and loan loss
provisions of `100 mn each.
Cost-income ratio declined marginally to 36% from 37% in June 2011—largely driven by
stable staff costs. Staff expenses increased by 25% yoy. Non-staff expenses increased
38% yoy (23% qoq).
Tier-1 ratio for the quarter was at 9.4%. A slowdown in overall loan growth has resulted
in lower capital consumption and we believe that the bank should be able to grow
comfortably without any near-term concern on pace of capital consumption.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
YES Bank (YES)
Banks/Financial Institutions
Holding fort in the current environment. Yes Bank reported 33% earnings growth
driven by moderate NIM expansion (10 bps) and healthy non-interest income—earnings
impressive despite a high interest rate environment that is difficult for the bank’s
operating environment. Fee income was driven by capital market activities and core
transaction banking. Asset quality trends have been strong with negligible slippages
while restructured loans increased primarily from MFIs. The bank is currently trading at
2.2X book and 11X FY2012E EPS for 20% RoEs and EPS growth of about 25% CAGR
for FY2011-13E. Retain BUY and TP of `420.
High interest impacts growth while fee income contribution showed improvement; maintain BUY
Yes Bank’s earnings (33% yoy) were driven by healthy revenue growth (35% yoy) led by strong
contribution from margin expansion (10 bps), capital market-related businesses and core
transaction banking. Cost of funds remains high at 8.6% implying a negative return in its SLR
portfolio and making it difficult to grow balance sheet (21% yoy) at current NIMs. We see growth
delayed by a few quarters till interest rates cools off from current levels. Fee income has been
impressive but the quarter saw a few one-off large transactions in capital markets (debt-related)
driving performance—unlikely to be repeated given market conditions but we expect core
transaction banking fees to drive overall non-interest income.
Weak CASA deposit mobilization remains a key disappointment (2% qoq and 20% yoy). CASA
ratio is flat qoq at 11% and recent branch expansion is yet to make meaningful contribution to
overall CASA deposits. We have broadly maintained our estimates (increased credit costs to factor
the current environment) and note that the low interest rate environment conducive for wholesale
business models like that of Yes Bank. Retain BUY and target of `420 valuing the bank at 2.6X
FY2013E book and 13X EPS. We expect Yes Bank to outperform the broader market as interest
rates soften from current levels.
NIMs improve 10 bps to 2.9%; high cost of funds implies negative yields on SLR
NIMs for the quarter improved by 10 bps to 2.9% on the back of shift in the composition of assets
and liabilities. The bank has shed some wholesale loans and sourced relatively low-cost borrowings
(including overseas funds) to manage its liabilities. Cost of funds remains high at 8.6%, implying
negative returns on SLR deposits. Overall loan yields remain high at 12.2%, one of the highest
among peers for an asset portfolio primarily in corporate segment.
We maintain our current NIM assumptions (20 bps decline in FY2012E but an improvement of
about 10 bps in FY2013E). The bank should see early benefits when interest rates decline as the
bank has a larger share of shorter duration liabilities (except capital funds).
Weak loan growth as credit substitutes take a higher share of growth
Yes Bank’s reported loan growth was weak at 13% yoy (3% qoq) as focus shifted to non-
SLR-related investments which grew sharply qoq (40% qoq). We believe that the increase in
lending through credit substitutes, primarily in the form of CP/bonds, looks opportunistic,
client-driven rather than choice. Expect sell-down from this portfolio as yields decline from
current levels and shift focus to loan growth.
Overall composition of loans changed marginally towards retail (includes portfolio/loans
buyouts) which is currently about 15% of loans (12% in June 2011). Large corporate houses
account for about 60% of loans while the mid-corporate segment is about 25% of loans.
Given the lumpiness in corporate loans and interest rates, we expect loan growth at 30%
CAGR for FY2011-13E.
Balance sheet growth supported by growth in borrowings and less on deposits
Overall deposits grew by 10% yoy (1% qoq) as compared to balance sheet growth of 21%
yoy growth as the bank looked at other windows to mobilize funds. The management
indicated that a combination of refinancing facilities from various domestic and international
markets was utilized over the past few quarters to mobilize marginally lower cost funds.
We note that the bank has accelerated the branch expansion which could probably result in
improvement in the liability franchise. The bank opened 50 branches (134 branches in the
past four quarters) taking the total branches to 305. However, while deposits from branches
have grown impressively (about 100% yoy), improving CASA ratio continues to remain a
struggle. CASA ratio is currently at 11% (flat qoq) despite weak deposit growth.
Fee income boosted from financial markets; transaction banking impressive
Yes Bank saw overall non-interest income grow 63% yoy primarily on the back of strong
business from debt underwriting (few large deals) and healthy growth in transaction
banking income. Consequently, fee income to assets improved to 1.4% having declined to a
low of 1.1% in June 2011. Performance on core transaction banking-related activities was
impressive (59% yoy). Financial markets (forex related) grew 20% while retail fees were flat.
Given the market conditions, we expect a more subdued performance in capital marketrelated
activities but expect healthy growth in core banking-related activities. We are
building fee income to grow by 25% CAGR for FY2011-13E.
Other highlights for the quarter
Asset quality continues to remain very healthy with gross NPLs at 0.2% and net NPLs
0.04% of loans. Slippages were negligible for the quarter (about 20 bps). Restructured
assets increased by `885 mn to `1.7 bn (0.5% of loans) as the bank restructured few MFI
accounts—classified as standard post CDR exercise. The bank has made an ad hoc
provisions of about `80 mn during the quarter in addition to specific and loan loss
provisions of `100 mn each.
Cost-income ratio declined marginally to 36% from 37% in June 2011—largely driven by
stable staff costs. Staff expenses increased by 25% yoy. Non-staff expenses increased
38% yoy (23% qoq).
Tier-1 ratio for the quarter was at 9.4%. A slowdown in overall loan growth has resulted
in lower capital consumption and we believe that the bank should be able to grow
comfortably without any near-term concern on pace of capital consumption.
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