Yes’ strong 1Q14 (PAT up 38% to Rs4B) is not that important, in our
view; the ability to cope with higher rates is the key issue. Management is
sanguine about margin resilience to higher rates – we think it could come
at the cost of growth. We believe the market overreacted – both on the
permanency of high rates and its impact on Yes’ earnings. At a P/E of 8.3x
FY14E (on consensus, which we think is too conservative) we think it’s too
late to sell, and see this more as an entry opportunity. The caveat is that
the rate environment will stay challenged for weeks and, with no nearterm catalysts, the stock’s short-term volatility could persist for a while.
Impact of RBI tightening. Management quantified the static balance
sheet gap at 10% – i.e., a 100bp rate rise affects margins by 10bp. This is
offset by ~70% of the book being base rate – a 25bp base rate rise would
more than cover the potential NIM losses. The treasury book is unlikely
to see losses at today’s bond yield levels. Our view: base rate increases
would probably cushion the margin pressure significantly but would
constrain growth. That is a smaller problem – growth is a weaker
earnings determinant than margins. We think the stock price reaction
overestimates the earnings impact.
1Q earnings summary. Loan growth was strong at 24%, led by retail
and commercial segments. Margins were flat q/q. Non-interest income
was very strong, driven by treasury and loan-related fees: both these are
now vulnerable in the current high-rate environment. The bank raised
provisioning to keep credit costs at ~80bp – it now has a 100bp buffer as
floating/countercyclical provisions. Incremental delinquency was muted
at 21bp. The CASA ratio improved to 20% and the momentum could
accelerate through the year, according to management.
Earnings outlook. We will revisit revenue forecasts – growth, margins
and fees – once the dust settles in the money market. Any potential risks
to earnings should largely be covered by downside to our aggressive
credit cost forecasts (110bp for Jun-Mar), in the context of the
countercyclical buffer. We are 16% > consensus – there is some risk to
our forecasts but we still see scope for significant consensus upgrades.
��
view; the ability to cope with higher rates is the key issue. Management is
sanguine about margin resilience to higher rates – we think it could come
at the cost of growth. We believe the market overreacted – both on the
permanency of high rates and its impact on Yes’ earnings. At a P/E of 8.3x
FY14E (on consensus, which we think is too conservative) we think it’s too
late to sell, and see this more as an entry opportunity. The caveat is that
the rate environment will stay challenged for weeks and, with no nearterm catalysts, the stock’s short-term volatility could persist for a while.
Impact of RBI tightening. Management quantified the static balance
sheet gap at 10% – i.e., a 100bp rate rise affects margins by 10bp. This is
offset by ~70% of the book being base rate – a 25bp base rate rise would
more than cover the potential NIM losses. The treasury book is unlikely
to see losses at today’s bond yield levels. Our view: base rate increases
would probably cushion the margin pressure significantly but would
constrain growth. That is a smaller problem – growth is a weaker
earnings determinant than margins. We think the stock price reaction
overestimates the earnings impact.
1Q earnings summary. Loan growth was strong at 24%, led by retail
and commercial segments. Margins were flat q/q. Non-interest income
was very strong, driven by treasury and loan-related fees: both these are
now vulnerable in the current high-rate environment. The bank raised
provisioning to keep credit costs at ~80bp – it now has a 100bp buffer as
floating/countercyclical provisions. Incremental delinquency was muted
at 21bp. The CASA ratio improved to 20% and the momentum could
accelerate through the year, according to management.
Earnings outlook. We will revisit revenue forecasts – growth, margins
and fees – once the dust settles in the money market. Any potential risks
to earnings should largely be covered by downside to our aggressive
credit cost forecasts (110bp for Jun-Mar), in the context of the
countercyclical buffer. We are 16% > consensus – there is some risk to
our forecasts but we still see scope for significant consensus upgrades.
Key takeaways from the conference call:
The yield on the corporate bond portfolio is around 10.75-11%. There could
be some losses on individual corporate bonds but on an overall basis there
are no losses in the corporate bond portfolio currently.
The higher income in financial markets was mainly due to realized gains on
the government bonds shifted from HTM to AFS category in 1Q14.
The bank runs a negative ALM gap of Rs80-100B which can impact
margins by 8-10bp if they do not pass on the increase in costs to borrowers.
However a 25bp increase in base rate will offset the increase in costs in the
medium term.
The staff costs were higher (up 30% YoY & 16% QoQ) mainly because of a
13% increase in salary increments and addition of 434 employees in 1Q14.
The increase in credit costs (82bp) was mainly because of a Rs750MM
countercyclical buffer created in 1Q14. Some of the legacy accounts in the
restructured assets are repaying. The bank has not restructured any loans in
1Q14.
Credit substitute book is unlikely to grow in this environment; however
overall loan growth should be strong.
Though the incremental savings growth slowed in 1Q14 due to seasonality
the overall customer acquisition growth was strong in 1Q14.
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