YES Bank:Aggressive growth; fee disappoints:Buy says Kotak Sec

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YES Bank (YES)
Banks/Financial Institutions
Aggressive growth; fee disappoints. Yes Bank reported strong earnings (58% yoy)
for 2QFY11 driven by strong loan growth (up 86% yoy) with stable asset quality (net
NPL at 0.1%) and margins (3%). Fee income disappointed driven by sharply lower
transaction banking fees. Deposits growth was at 107%, while CASA deposits grew by
118%. We continue to like Yes Bank given its focus on growth in the current
environment. Stock trades at 2.8XFY2012E PBR. We raise TP to `400, maintain BUY.


Loans up 86% yoy, 37% YTD; on path for a strong growth in FY2011E
Expectations of loan book growth slowing did not materialize in the current quarter with Yes Bank
reporting 86% yoy and 16% qoq growth to `303 bn (37% YTD). Sequentially, loan book saw
higher proportion of loans into food and agri (16% of loans), infrastructure and logistics (22% of
loans). Telecom exposure has reduced to 19% of loans from 23% in June 2010. In terms of
segmental contribution, retail has increased to 10% as the bank has included PSL lending in this
portfolio. We have revised our loan growth to 44% CAGR for FY2010-12E.
Margins decline 10 bps to 3.0%; CASA ratio declines 40 bps to 10.1%
Yes Bank saw margins decline by 10 bps at 3% for the quarter as cost of deposits increased by 40
bps while lending yields have remained flat qoq. Net interest income grew by 78% yoy and 19%
qoq to `3.1 bn. CD ratio declined 110 bps to 76% qoq.
Deposits growth (107% yoy) was led by CASA (118% yoy but proportion declined by 40 bps qoq
to 10.1% but improved 50 bps from 2QFY10). The bank has added 18 branches during the
quarter and expects to reach 250 branches in 2HFY11E and this should help build CASA ratio for
the bank. We are building in an improvement of 300 bps over next two years.
Slow growth in transaction banking disappoints; losses reported in treasury income
Non-interest income declined 3% for the quarter with muted growth from transaction banking as
well as losses in the investment book. Transaction banking grew by 9% yoy while the bank
reported `150-200 mn treasury losses (G-Sec, corporate bonds and equity). Financial advisory
grew by 13% while retail fee growth was impressive at 40% yoy. We would watch the growth
over the next few quarters, especially on transaction banking, but keeping our current fee income
growth assumptions at 28% CAGR