Yes Bank - Accumulate -2QFY2011 Result Update :: Angel Broking

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Yes Bank - Accumulate -2QFY2011 Result Update
Yes Bank reported robust net profit growth of 57.8% yoy and
12.7% qoq to `176cr well above our estimates of `138cr on
account of substantially higher balance sheet growth than
guided by the bank towards the beginning of the year. Robust
growth and stable asset quality were the key positives of the
results.
Robust growth in balance sheet continues: Advances grew by
a strong 15.6% qoq and 86.3% yoy compared to a marginal
industry qoq growth of ~0.6%. Deposits increased 32.3% qoq
and 106.6% yoy compared to ~1.6% qoq industry growth.
This drove 95.8% yoy growth in NII, in spite of the sequential
NIM compression of 10bp due to the higher-than-sectoraverage
(40bp) increase in cost of funds. Non-interest income
declined 13.6% yoy and 8.9% qoq to `131cr in 2QFY2011
due to the sharp fall in financial market income. The bank's
capital adequacy ratio (CAR) improved to 19.4%, with tier-I
capital of 11.0% (total CAR of 16.6% in 1QFY2011).
Strong NII growth: NII registered 95.8% yoy (77.9% yoy on
reclassified numbers) and 19.5% qoq growth to `313cr in
2QFY2011. Reported NIM declined by 10bp sequentially as
well as on yoy basis to 3.0% in 2QFY2011, due to a higher
then sector average increase in the cost of funds (by 40bp),
reflecting the bank's wholesale-oriented business model. Going
forward, as the interest rates start rising, the bank's NIMs are
expected to be under pressure due to the very low CASA ratio
of 10.1%.
Stable asset quality: As of 2QFY2011, gross NPA ratio stood at
0.2% and net NPA ratio at 0.1% (as against 0.2% and 0.0% in
1QFY2011, respectively). Restructured advances declined by
`11cr during 2QFY2011, taking total restructured advances to
`69cr at the end of 2QFY2011, and constituted 0.2% of
advances. The provision coverage ratio stood at 74.8% as of
2QFY11 (81.0% in 1QFY11). In our opinion, the bank's present
gross NPA's are significantly lower than the sectoral average

relative to the bank's high-yield credit portfolio. Accordingly,
from a structural point of view, we believe asset quality
deterioration remains a risk for the bank.
Non-interest income below expectations: Non-interest income
declined 13.6% yoy to `131cr in 2QFY2011 (down 8.9% qoq).
Financial market income declined 57.6% yoy to `14.1cr.
However, income from third-party distribution and retail fees
grew by a robust 43.3% yoy. Revenue from transaction banking
grew by a modest 8.5% yoy. Income from financial advisory
witnessed moderate growth of 13.1% yoy.
Outlook and Valuation
As in the past, the inherent challenges of building a retail
franchise continue to be substantial despite management's high
pedigree. Moreover, with rising interest rates, the bank's cost of
funds is expected to rise at a faster rate due to the bank's
wholesale-based funding mix. That said, notwithstanding the
medium-term downside risks to RoA's vis-a-vis sectoral averages
as well as execution risks with respect to its retail expansion
plans, the bank's high rate of growth within the wholesale
segment is likely to drive strong earnings growth and capital
consumption in the near term (potentially leading to another
book-accretive dilution in the next 12 months). At the CMP, the
stock is trading at 2.7x FY2012E ABV. We recommend
Accumulate on the stock, with a Target Price of `373, at which
level the stock would trade at 2.9x FY2012E ABV.