Yes Bank’s Q3FY13 PAT at INR3.42bn (up 34.7% YoY) surpassed our
estimate. In spite of proactive provision of INR0.5bn towards Deccan
Chronicle (net exposure now at INR0.3bn) beat at the NII level (up 36.7%
YoY) and fee income acceleration (up 48% YoY) aided performance. Good
got better; led by recoveries and lower slippages, headline asset quality
continued to impress with GNPA coming off from 0.24% to 0.17%, while
restructured book is at mere 0.43%--NIL restructuring during the quarter.
Saving bank balances surged 27% QoQ to propel CASA to 18.3% (10.3% in
FY11)—a key beneficiary of the saving rate deregulation. We remain
confident of management’s ability to execute Version II strategy (30%
CASA by FY15) and consequently tread the path of re-rating. Maintain
‘BUY’ with target price of INR615.
CASA: Success story continues post saving rate deregulation
In line with its Version II strategy, Yes Bank has been aggressively garnering SA
balances, post the interest rate deregulation, by offering 6-7%. CASA picked up from
17.3% to 18.3% QoQ, largely contributed by traction in SA, up 27% QoQ. While SA at
~8.7% is currently small to make any significant dent in cost of funds, it is a step in the
right direction as the bank targets high profile clients who can be tapped for cross sell.
NIMs improve 10bps as cost of funds on tight leash
NIMs improved 10bps to 3%, given benefits of lower COF (down 20bps QoQ to 8.5%)
due to the move to seek lower cost borrowing and healthy traction in SA. Yes Bank,
through a well matched ALM, has managed to restrict margin volatility to 2.8-3.1%
over the past four years. We are building in average NIMs of 2.9% by FY14E as the
increasing CASA and decline in wholesale rates will lower cost of funds.
Outlook and valuations: Improving profitability; maintain ‘BUY’
We expect Yes Bank to grow well above the system, with a well entrenched fee income
platform, improving CASA and lower credit costs, delivering superior earnings (~28%
CAGR over FY12-15E) and attractive RoA/RoE of 25%/1.7% by FY14E. The stock is trading
at 2.6x FY14E adj. book. Maintain ‘BUY/ Sector Outperformer’.
Customer asset growth impressive at 27.4%; pick up in advances
During Q3FY13, Yes Bank’s credit (advances + credit substitutes) grew 27.4% YoY to
INR557.5bn. Within this, advances accounted for 78.7% (~84% a year ago), a function of
increasing share of credit substitutes over the past one year. However, during the current
quarter, advance book picked up to 4.4%(QoQ) higher than credit substitutes – a trend
expected to continue as interest rates soften in the system. Advance growth was largely
contributed by large corporate segment (up 27% YoY) and commercial banking segment (up
17.7% YoY) offsetting some moderation in retail banking segment (8.6% YoY).
Best-in-class asset quality performance continues
Yes Bank’s headline asset quality improved further as it partly recovered an INR200mn
account, taking GNPLs down to 0.17% from 0.24%. NNPL continued to stay at negligible
levels of 0.04%. With no additions in the restructured pool during the quarter, the bank’s
outstanding restructured assets stand at a mere 0.43% of advances. With weak assets of
INR2.7bn (reported gross NPAs + standard asset restructuring) (~60bps), we believe the
bank is well positioned to steer the asset quality out of pressures compared to peers.
Provisions during the quarter surged 78.6% QoQ to INR567mn as Yes Bank made additional
provisions of INR450mn towards Deccan Chronicle. We are confident of management’s
execution capability to guide through the current cyclical slowdown since it came out
relatively unscathed during the previous financial crisis.
Strong fee income led by financial advisory
Fee income came in strong at INR31.3bn up 48.1% YoY, contributed by a robust
performance in financial advisory offsetting some moderation in financial markets
(predominantly debt capital and forex segments) down ~18% YoY . While volatility in
segments of financial market and advisory can be chunky nature of the revenue flow,
revenue from the core fee segment–transaction banking–is starting to show predictability.
Retail banking segment has seen a healthy ramp up over the quarter, up 66% YoY (forming
10% of total fees) in line with its strategy of building in granularity in fee income.
Cost-to-income improves
The bank’s cost-to-income ratio for Q3FY13 was steady at 37.2% QoQ, yet at the lower end
of private sector bank peer group. During the quarter, it added 12 branches (412 as of
Q3FY13). Even as Yes Bank expands its footprint, with focus on scaling up branch banking
business , CASA pool and revenue traction to keep cost-income ratio around 40% mark.
Capital raising in CY13
Yes Bank has the board’s approval to raise USD500mn capital. However it believes in the
interim, current capital along with internal accruals is sufficient to sail through. Further, the
INR100bn bond portfolio that the bank carries was originated to down sell and hence if
needed some capital can be released via this book as well. Given its track record, we expect
Yes Bank to raise capital at an attractive valuation, limiting earnings dilution and providing a
significant boost to book value. Tier 1 currently stands at 9.5%.
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