Yes Bank --YES is a ―NO for the time being : Macquarie Research

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Yes Bank
YES is a ―NO‖ for the time being
Event
 Sharp rally since the beginning of the year leaves with limited upside,
Downgrade to Neutral: We downgrade YES Bank to Neutral from
Outperform. The stock is up 60%+ since the beginning of the year and we see
limited upside after such a sharp rally. Unless there are very aggressive rate
cuts by RBI and/or wholesale rates plummet, we don’t see material re-rating
from current levels.

Impact
 Expect pick-up in restructured assets over the next 4 quarters: Though
YES Bank’s quality of book is likely to be much better than most other
corporate-focused banks, we expect some deterioration in asset quality and a
pick-up in restructured assets in the next 12 months. NPLs at 20bps and
credit costs at 10bps currently are unsustainable, in our view.
 Priority sector guidelines could be painful: The proposed draft priority
sector guidelines, which suggest 9% credit to small and marginal farmers is
bound to exert pressure on overall profitability – margins, opex and asset
quality. On a ceterus paribus basis according to our analysis, the impact on
NIMs could be 30bps.
 Savings rate de-regulation is proving beneficial: There has been a sharp
accretion in savings deposits after they rose 44% QoQ in 3QFY12. Traction
on savings accounts (leads, account openings etc) is 3-4x better than the
traction before savings deposit rate were de-regulated, according to
management.
 Pace of branch addition very healthy: Over the past 12 months, YES Bank
added 146 branches, which is encouraging. The reliance on retail deposits
has risen rapidly, with branch banking plus CASA deposits constituting nearly
31% of overall deposit base as of 3QFY12—up 700bps YoY.
Earnings and target price revision
 We cut our earnings by 11% and 17% for FY13E and FY14E on account of
equity dilution and higher opex. TP is unchanged at Rs380, owing to the cost
of equity changes which prompt a slightly higher target multiple.
Price catalyst
 12-month price target: Rs380.00 based on a Gordon growth methodology.
 Catalyst: Increase in restructured assets
Action and recommendation
 Stock trading at 2.0x P/BV – inline with historical valuations: Growth this
cycle is going to be much lower than the previous cycle, and we don’t think
the previous high valuations are likely to be reached. Downgrade to Neutral
with TP of Rs380.


Valuation
We value YES Bank on a two-stage Gordon growth model using:
P/BV = RoE * {(p(1+g) * (1- (1+g)n/(1+r)n)) + (pn(1+g)n(1+gn))/((r-gn)(1+r)n)} where g=growth rate
for the first n (high-growth period) years, p= dividend payout ratio in the first n years, gn=perpetual
growth rate, pn=perpetual dividend payout ratio
Fig 1 YES Bank – Valuation methodology
Components of two stage model Our assumption
Sustainable ROE 18.9%
Initial no of years 10
Growth rate for the first 10 years 15%
Payout ratio for the first 10 years 20%
Perpetual growth rate 4%
Perpetual payout ratio 80%
Target Price to Book Ratio – two stage Gordon growth model 2.0x
FY13E Book Value per Share (Rs) 190
Target price (Rs; rounded up) 380
Source: Company data, Macquarie Research, January 2012