YES BANK Growth unlimited (Sept 2010 qtr review) :: Edelweiss

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Yes Bank continues to step on the growth accelerator, and has grown 16% Q-o-Q
and 86% Y-o-Y, well above the system growth of 20%, capitalising on short-term
lending opportunities. Strong business traction has offset the 10bps decline in
reported margins, resulting in an impressive 20% Q-o-Q NII growth, ahead of our
estimates. Fee income has, however, been moderate once again, and coupled with
MTM loss of INR 150 mn, pulled down other income. The bank’s asset quality
continues to be benign with positives emerging from lower NPL provisions.
􀂄 Growth unlimited: Advance book up 86% Y-o-Y
Led by strong disbursement to infrastructure and engineering sectors, Yes Bank
once again delivered robust advances growth of 86% Y-o-Y. Quality of the book
improved as proportion of large corporate loans increased to 70% from 65% a
year ago - a function of incremental lending to telecom operators. Deposits grew
107% Y-o-Y, largely buoyed by IPO floats under the ASBA scheme. Management
expects loan book growth of 40-45% in FY11E.
􀂄 Fee income growth below expectation
Over the past few quarters, fee income has picked up only modestly. During the
quarter, transaction banking fee income was relatively subdued, up only 9% Y-o-
Y. Management expects increased traction, going forward, as it leverages new
business relationships. Financial advisory fees (savior in Q1) came off 16% Q-o-
Q, but grew 13% Y-o-Y, reflecting lumpiness in income stream. During the
quarter, MTM loss of ~200 mn pulled down the financial market income stream
(down 72% Y-o-Y).
􀂄 Outlook and valuations: Strong momentum; maintain ‘BUY’
Led by higher-than-expected advance growth and lower credit cost, we are
revising our earning estimate by 8% and 15% for FY11 and FY12 respectively.
With capital in place, we expect Yes Bank could grow well above system,
delivering superior earnings (at ~44% CAGR over FY10-12E) and ramping RoEs
up to an attractive level in a short time span (~23% in FY12E). Also,
management has demonstrated its strong execution capabilities by managing
the bank during the cyclical downturn. The stock is currently trading at 2.6x
FY12E adjusted book and 12.1x FY12E earnings. We maintain ‘BUY/Sector
Outperformer’ on the stock.