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Yes Bank
Beta in the banking space; initiate with UNDERPERFORM
We initiate coverage with UNDERPERFORM and price
target of Rs310.
Yes Bank management deserves full credit for building a
strong and profitable franchise in a short period.
We remain concerned about Yes Bank’s low CASA and
high deposit concentration in a rising rate environment.
We believe that most operating parameters have
peaked for Yes Bank. Credit cost can only rise from
here, in our view.
Our forecast RoA of 1.3% for FY12E is lower than our
forecasts for ICICI Bank /Axis Bank /HDFC Bank
Strong execution – Yes Bank’s management has delivered
strong growth and profitability in a short span of seven years
with asset growth of 76% p.a. over FY06-FY10, profit
growth of 71% and the lowest level of gross NPLs in the
sector at 0.2% of loans.
Weak liability franchise, bulky exposures and peaking
profitability metrics are key concerns – We remain
concerned about Yes Bank’s low CASA of 10%, especially
in a rising rate environment. Yes Bank’s exposures to the
sensitive sectors of telecom and microfinance as a
proportion to its net worth are significantly higher than
sector averages. Further, most profitability/productivity
parameters have peaked for Yes Bank, in our view.
Yes Bank already has the highest deposit per branch
among the banks we track. Credit costs are amongst the
lowest in the industry and will likely move up given higher
than sector exposure to sensitive sectors and rapid loan
growth in the past. We expect RoA of 1.3% in FY12E which
will be lower than our forecasts RoAs for other private
banks. We expect earnings growth of 34% over FY11-
FY13E, slower than 54% over FY08-10.
Valuation – We value Yes Bank at 2.3x FY12E P/BV based
on sustainable RoA of 1.3% and RoE of 19.6%. We expect
the stock to trade lower than its five-year average as we see
a decline in RoAs and believe that profitability and
productivity parameters have peaked.
Risks – Better-than-expected liquidity will be more beneficial to
Yes Bank than other high CASA banks and is a key upside
risks to our NIM assumptions. Higher-than-expected credit cost
is a key downside risk.
Valuation
Our price target of Rs310 for Yes Bank is based on 2.3x FY12E P/BV. We have used sustainable
RoA of 1.3x, sustainable RoE of 19.6% and CoE of 13%. Over the past five years, Yes Bank has
traded at an average multiple of 2.6x P/BV one-year forward, a low multiple of 0.5x and a high
multiple of 5.1x. We expect Yes Bank to trade lower than its last five-year average as we see
earnings growth slowing down and we believe productivity / profitability parameters for Yes Bank
have peaked.
Yes Bank already has the highest deposits per branch among the banks we cover. However,
CASA per branch is amongst the lowest. Yes Bank has amongst the lowest credit costs in the
industry at 0.3%. With above-industry loan growth and higher than industry exposures to
sensitive sectors such as telecom and microfinance, we expect that sustainable credit cost will be
higher than current credit costs. We expect RoA to decline to 1.3% by FY12E from 1.6% in FY10
and 1.5% in FY11E. Yes Bank’s cost to income ratio can only rise from the current (below
industry) levels of 36% in 3Q FY11, with the rapid growth in branches planned by management.
Company Profile
Established in May 2004, Yes Bank is the last private bank to be awarded a banking license. With
total assets of over Rs500bn, Yes Bank operates through 185 branches across 149 cities with a
focus on corporate and investment banking operations.
Management team
Managing Director & CEO: Rana Kapoor
Prior to establishing Yes Bank, he was CEO & Managing Director of Rabo India Finance (RIF)
Pvt. Ltd., and earlier was the General Manager & Country Head: ANZ Grindlays’ Investment
Bank (ANZIB, from 1996-98). He has also spent 15 years at Bank of America (1980-1995), where
he last headed the Bank’s Wholesale Banking businesses. He holds a MBA degree from Rutgers’
University in New Jersey, U.S.A. (1980), and a Bachelor’s degree in Economics (Honours) from
the University of Delhi (1977).
Group President- Financial Markets & Chief Financial Officer: Rajat Monga
Prior to joining Yes Bank, he served with Rabo India Finance as the Head, Financial Markets,
India. He has also worked with the Unit Trust of India as a part of the Market Operations
Department where he co-managed four equity mutual fund schemes, along with undertaking
secondary market debt operations for all debt mutual fund schemes. He is an engineer from IIT
Delhi and holds a postgraduate diploma in Management from IIM, Ahmedabad
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Yes Bank
Beta in the banking space; initiate with UNDERPERFORM
We initiate coverage with UNDERPERFORM and price
target of Rs310.
Yes Bank management deserves full credit for building a
strong and profitable franchise in a short period.
We remain concerned about Yes Bank’s low CASA and
high deposit concentration in a rising rate environment.
We believe that most operating parameters have
peaked for Yes Bank. Credit cost can only rise from
here, in our view.
Our forecast RoA of 1.3% for FY12E is lower than our
forecasts for ICICI Bank /Axis Bank /HDFC Bank
Strong execution – Yes Bank’s management has delivered
strong growth and profitability in a short span of seven years
with asset growth of 76% p.a. over FY06-FY10, profit
growth of 71% and the lowest level of gross NPLs in the
sector at 0.2% of loans.
Weak liability franchise, bulky exposures and peaking
profitability metrics are key concerns – We remain
concerned about Yes Bank’s low CASA of 10%, especially
in a rising rate environment. Yes Bank’s exposures to the
sensitive sectors of telecom and microfinance as a
proportion to its net worth are significantly higher than
sector averages. Further, most profitability/productivity
parameters have peaked for Yes Bank, in our view.
Yes Bank already has the highest deposit per branch
among the banks we track. Credit costs are amongst the
lowest in the industry and will likely move up given higher
than sector exposure to sensitive sectors and rapid loan
growth in the past. We expect RoA of 1.3% in FY12E which
will be lower than our forecasts RoAs for other private
banks. We expect earnings growth of 34% over FY11-
FY13E, slower than 54% over FY08-10.
Valuation – We value Yes Bank at 2.3x FY12E P/BV based
on sustainable RoA of 1.3% and RoE of 19.6%. We expect
the stock to trade lower than its five-year average as we see
a decline in RoAs and believe that profitability and
productivity parameters have peaked.
Risks – Better-than-expected liquidity will be more beneficial to
Yes Bank than other high CASA banks and is a key upside
risks to our NIM assumptions. Higher-than-expected credit cost
is a key downside risk.
Valuation
Our price target of Rs310 for Yes Bank is based on 2.3x FY12E P/BV. We have used sustainable
RoA of 1.3x, sustainable RoE of 19.6% and CoE of 13%. Over the past five years, Yes Bank has
traded at an average multiple of 2.6x P/BV one-year forward, a low multiple of 0.5x and a high
multiple of 5.1x. We expect Yes Bank to trade lower than its last five-year average as we see
earnings growth slowing down and we believe productivity / profitability parameters for Yes Bank
have peaked.
Yes Bank already has the highest deposits per branch among the banks we cover. However,
CASA per branch is amongst the lowest. Yes Bank has amongst the lowest credit costs in the
industry at 0.3%. With above-industry loan growth and higher than industry exposures to
sensitive sectors such as telecom and microfinance, we expect that sustainable credit cost will be
higher than current credit costs. We expect RoA to decline to 1.3% by FY12E from 1.6% in FY10
and 1.5% in FY11E. Yes Bank’s cost to income ratio can only rise from the current (below
industry) levels of 36% in 3Q FY11, with the rapid growth in branches planned by management.
Company Profile
Established in May 2004, Yes Bank is the last private bank to be awarded a banking license. With
total assets of over Rs500bn, Yes Bank operates through 185 branches across 149 cities with a
focus on corporate and investment banking operations.
Management team
Managing Director & CEO: Rana Kapoor
Prior to establishing Yes Bank, he was CEO & Managing Director of Rabo India Finance (RIF)
Pvt. Ltd., and earlier was the General Manager & Country Head: ANZ Grindlays’ Investment
Bank (ANZIB, from 1996-98). He has also spent 15 years at Bank of America (1980-1995), where
he last headed the Bank’s Wholesale Banking businesses. He holds a MBA degree from Rutgers’
University in New Jersey, U.S.A. (1980), and a Bachelor’s degree in Economics (Honours) from
the University of Delhi (1977).
Group President- Financial Markets & Chief Financial Officer: Rajat Monga
Prior to joining Yes Bank, he served with Rabo India Finance as the Head, Financial Markets,
India. He has also worked with the Unit Trust of India as a part of the Market Operations
Department where he co-managed four equity mutual fund schemes, along with undertaking
secondary market debt operations for all debt mutual fund schemes. He is an engineer from IIT
Delhi and holds a postgraduate diploma in Management from IIM, Ahmedabad
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