J.P. Morgan -Yes Bank

Yes Bank (YES IN) Q414 results: lower PPOP growth, asset quality improved		Underweight Price: Rs441.35 23 Apr 2014 Price Target: Rs360.00 PT End Date: 31 Mar 2015

Yes Bank reported PAT of Rs 4.3bn (up 19% y/y, 9%> JPMe), mainly on account of lower provisions. PPOP growth remained subdued due to higher opex. Asset quality improved despite weak macro. Margins expanded by ~10bp, driven by lower funding costs. We maintain our UW on the stock as the cheap absolute valuations aren’t that attractive in the context of slowing earnings.

Table 1: Q414 result table

Yes bank	4Q13	3Q14	4Q14	YoY	QoQ
NII	6,381	6,655	7,196	12.8%	8.1%
Other inc	3,794	3,879	4,455	17.4%	14.9%
Opex	3,836	4,387	4,847	26.3%	10.5%
PPOP	6,339	6,147	6,804	7.3%	10.7%
Provisions	975	133	723	-25.9%	443.9%
PBT	5,364	6,014	6,082	13.4%	1.1%
Tax	1,742	1,858	1,779	2.1%	-4.2%
PAT	3,622	4,156	4,302	18.8%	3.5%
NIM	3.0%	2.9%	3.0%	0.0%	0.1%
Cost-Income	37.7%	41.6%	41.6%	3.9%	0.0%
Provisions/PPOP	15.4%	2.2%	10.6%	-4.8%	8.5%
Tax rate	32.5%	30.9%	29.3%	-3.2%	-1.6%
Balance sheet data
Loans	469,996	502,929	556,330	18.4%	10.6%
Customer assets	603,563	637,842	696,397	15.4%	9.2%
Deposits	669,556	680,599	741,920	10.8%	9.0%
Credit to Deposit	70.2%	73.9%	75.0%	4.8%	1.1%
CASA Ratio	18.9%	20.9%	22.0%	3.1%	1.1%
Asset Quality
Gross NPA	943	1,958	1,749	85.5%	-10.7%
Net NPA	70	423	261	273.0%	-38.4%
Gross NPA (%)	0.20%	0.39%	0.31%	0.11%	-0.08%
Net NPA(%)	0.01%	0.08%	0.05%	0.04%	-0.03%
Credit cost	0.86%	0.58%	0.00%	-0.86%	-0.58%
Total Fee income	3,793	3,878	4,455	17.5%	14.9%
Financial markets	716	705	540	-24.6%	-23.4%
Financial advisory	1,656	1,630	1,762	6.4%	8.1%
Transactional banking	931	1,101	1,338	43.7%	21.5%
3rd party and retail fees	490	442	815	66.3%	84.4%
Capital
Tier 1	9.5%	9.9%	9.8%	0.3%	-0.1%
Tier 2	8.8%	6.2%	4.6%	-4.2%	-1.6%
CAR	18.3%	16.1%	14.4%	-3.9%	-1.7%

Source: J.P. Morgan estimates, Company data.

· Asset quality. Gross and Net NPL declined in absolute as well as % terms. Slippages during Q4 were lower at 0.4% v/s 1.2% in the previous quarter. Management clarified that slippages during the quarter were granular in nature whereas in the previous quarter it were concentrated in the mid corporate segment. We expect asset quality to remain under pressure given the weak macro and no visibility of any turnaround in the medium term. We expect credit costs of 90bp in FY15E.

· PPOP growth. PPOP growth remained subdued as opex growth was substantially higher at 26% y/y and 11% q/q whereas revenue growth was lower at 15% y/y. C/Income ratio has been steadily inching upwards (41.6% in Q414 v/s 37.7% in Q413). We expect PPOP growth to be lower in FY15E as the weak macro will result in lower growth opportunities for its high yielding wholesale book whereas building a retail franchise will result in higher costs for the bank.

· Margins. Margins improved by ~10bp in Q4 as funding costs declined by ~17bp. This was however offset by lower yields which were down ~13bp due to higher growth in low yielding retail loans. CASA ratio improved by 110bp q/q and stood at 22% in Q4. The momentum in SA balances continued which was up 55% y/y and 22% q/q. CA balances growth remained subdued at 5% y/y and 6% q/q.

Table 2: Dupont table

	1Q13	2Q13	3Q13	4Q13	1Q14	2Q14	3Q14	4Q14
NIM	2.4%	2.6%	2.7%	2.8%	2.6%	2.7%	2.6%	2.7%
Fees/Assets	1.5%	1.4%	1.5%	1.7%	1.8%	1.8%	1.5%	1.7%
Operating Expense/Assets	-1.6%	-1.5%	-1.6%	-1.7%	-1.7%	-1.6%	-1.7%	-1.8%
Provisions/Assets	-0.2%	-0.2%	-0.3%	-0.4%	-0.4%	-0.7%	-0.1%	-0.3%
ROA	1.5%	1.5%	1.6%	1.6%	1.6%	1.5%	1.6%	1.6%

Source: J.P. Morgan estimates, Company data.

Figure 1: Margins improved due to lower funding costs

Source: Company data.

Figure 2: Strong growth in SA balances led to improvement in CASA ratio

Source: Company data.

Figure 3: Savings growth remained strong

Source: Company data.

Figure 4: Growth momentum is slowing due to weak macro

Source: Company data.

 

Investment Thesis

We are UW on the stock as:

1. We do not expect any meaningful recovery in macro, hence asset quality is likely to remain under pressure in the medium term.This would translate into higher credit costs for the bank.

2. In the current high-rate environment, margins are likely to remain under pressure given that the bank is wholesale funded.

3. Capex cycle is likely to remain subdued given worsening macro; hence loan growth is likely to remain modest & also higher rates will result in stagnant corporate bond book.

Valuation

Our Mar-15 PT of Rs360 is based on a Gordon growth model with a normalized ROE of 17.5% and terminal growth of 5%.

Risks to Rating and Price Target

1) Loan growth could be higher than our expectations, with improving macro; 2) If the interest rate cycle turns quickly then margins could improve significantly for the bank, much higher than our expectations.

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