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YES Bank (YES)
Banks/Financial Institutions
Towards an improving liability profile. The medium-term impact of increasing
savings interest rates by 100 bps is likely to be neutral as the positive impact emerging
from a better liability franchise is likely to be offset by (1) increase in operating costs
and (2) risks from (a) creating a floor to term deposits at 6-7% and (b) negative impact
of a volatile savings rate. We maintain our positive view as we see focus on building a
liability franchise and improved productivity of the branch network. Maintain BUY with
TP of `375 (from `420 earlier) factoring the downward revisions to estimates.
Interest rates on savings accounts increase by 100 bps to 7%; competition unlikely to follow suit
We are not too excited by the recent move to increase interest rates for savings customers by 100
bps to 7% for balances above `0.1 mn and 6% for balances below `0.1 mn. While the move
helps to aggressively position itself to new customers, the medium-term financial implications of
such a move could be neutral. However, in the near term, competition is unlikely to follow suit as
(1) the average cost of deposits is yet to peak, though marginal rates have flattened (2) loan
demand has slowed in recent weeks and banks can focus on growing their liability business and
(3) share of savings accounts is comparatively higher for the industry, resulting in higher operating
expenses and no material benefit apart from maintaining current share.
Aggressive positioning to select groups; negatives remain
We believe the aggressive positioning is likely to target specific customer segments like high networth
individuals, government schemes and trusts/educational institutions. We await the
performance over the next few quarters to see the underlying growth trends.
On the negative side, a few risks are worth noting: (1) the current rate sets the floor for deposit
rates, especially for short tenors. The last cycle saw short-term rates declining to 3%, which are
unlikely to be reached this cycle, impacting growth or faster NIM expansion. (2) Operating
expenses may not reflect the cost-structures of a full-fledged retail bank. (3) Volatile savings rates
are likely to increase confusion and negative feedback (increasing at times of distress).
Focus on improving liability franchise is the key positive; maintain BUY
We like the serious approach towards improving the liability franchise despite the medium to long
term pay-offs from this change. The increase in rates gives a positive tailwind to the expanding
branch network as it gives a strong marketing tool to incentivize new customers to its fold and
hire strong liability acquisition teams. An expanding branch network with a low retail liability book
is always a threat to the balance sheet/earnings and results in a low productive work force for that
network. We are revising our earnings estimates by 3-7% over FY2012-14 to factor in (1) lower
growth and NIM compression, (2) increase in loan-loss provisions and (3) increase in operating
costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
YES Bank (YES)
Banks/Financial Institutions
Towards an improving liability profile. The medium-term impact of increasing
savings interest rates by 100 bps is likely to be neutral as the positive impact emerging
from a better liability franchise is likely to be offset by (1) increase in operating costs
and (2) risks from (a) creating a floor to term deposits at 6-7% and (b) negative impact
of a volatile savings rate. We maintain our positive view as we see focus on building a
liability franchise and improved productivity of the branch network. Maintain BUY with
TP of `375 (from `420 earlier) factoring the downward revisions to estimates.
Interest rates on savings accounts increase by 100 bps to 7%; competition unlikely to follow suit
We are not too excited by the recent move to increase interest rates for savings customers by 100
bps to 7% for balances above `0.1 mn and 6% for balances below `0.1 mn. While the move
helps to aggressively position itself to new customers, the medium-term financial implications of
such a move could be neutral. However, in the near term, competition is unlikely to follow suit as
(1) the average cost of deposits is yet to peak, though marginal rates have flattened (2) loan
demand has slowed in recent weeks and banks can focus on growing their liability business and
(3) share of savings accounts is comparatively higher for the industry, resulting in higher operating
expenses and no material benefit apart from maintaining current share.
Aggressive positioning to select groups; negatives remain
We believe the aggressive positioning is likely to target specific customer segments like high networth
individuals, government schemes and trusts/educational institutions. We await the
performance over the next few quarters to see the underlying growth trends.
On the negative side, a few risks are worth noting: (1) the current rate sets the floor for deposit
rates, especially for short tenors. The last cycle saw short-term rates declining to 3%, which are
unlikely to be reached this cycle, impacting growth or faster NIM expansion. (2) Operating
expenses may not reflect the cost-structures of a full-fledged retail bank. (3) Volatile savings rates
are likely to increase confusion and negative feedback (increasing at times of distress).
Focus on improving liability franchise is the key positive; maintain BUY
We like the serious approach towards improving the liability franchise despite the medium to long
term pay-offs from this change. The increase in rates gives a positive tailwind to the expanding
branch network as it gives a strong marketing tool to incentivize new customers to its fold and
hire strong liability acquisition teams. An expanding branch network with a low retail liability book
is always a threat to the balance sheet/earnings and results in a low productive work force for that
network. We are revising our earnings estimates by 3-7% over FY2012-14 to factor in (1) lower
growth and NIM compression, (2) increase in loan-loss provisions and (3) increase in operating
costs.
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