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YES Bank (YES)
Banks/Financial Institutions
Strong earnings, driven by lower provisions. Yes Bank reported strong 38%
earnings growth, driven by steady margins and lower provisions. Despite a high interest
rate environment, the bank has been able to maintain margins at 2.8%, which is
commendable, in our view. Branch openings have been strong over the last 6 months –
added 70 branches. However, CASA % at 10.9% remained weak this quarter despite a
slower balance sheet growth. Valuations are attractive at 2.4X book and 12X FY2012E
EPS for 20%+ RoE business. Increasing liability focus in its next leg of growth will be
crucial to sustain its high valuations. Retain BUY and TP of `420.
Impressive performance on net earnings, but weak show on CASA and fee income
Yes Bank’s 1QFY11 performance has been impressive, led by lower provisions on the back of a
decline in gross NPLs. Aggressive re-pricing has enabled margins to be maintained for the quarter.
With interest rates close to peak levels, we expect a more comfortable margin environment for the
bank. Though cost-income ratio has gone up marginally, it is still healthy at below 40% levels. The
bank has increased its workforce by 12% qoq, strengthening its front-end sales force.
However, we are somewhat disappointed by two key aspects and expect improvement over next
few quarters (1) CASA ratio improved by only 60 bps qoq despite de-growth in overall deposits. (2)
Fee income trends have been weaker, especially on transaction banking and financial advisory
resulting. Overall fee income to assets has declined to 1.1% from about 2% levels in FY2007-09.
We maintain our loan growth expectation for Yes Bank at 32% CAGR over FY2011-13E with
margins declining by about 25 bps yoy. Valuations at 2.4X book and 12X FY2012E EPS are
attractive for consistently returning high RoEs of about 20%. Retain BUY and target of `420
valuing the bank at 2.6X FY2013E book and 13X EPS.
Sequential decline of gross NPLs result in negligible provisions
Yes Bank reported another strong performance on asset quality with negligible slippages and
better recovery resulting in gross NPLs declining qoq. Gross NPLs are at 0.2% while net NPLs are at
0.01% of loans. Restructured asset are flat at `870mn (0.3% of loans). Write-back of provisions in
a fully provided account (recovered during the quarter) resulted in lower provisions. Asset quality
remains comfortable for the bank as of now, but given strong loan growth over last couple of
years, we expect gross NPL’s to rise to 0.8% by FY2012.
Margins maintained at 2.8% qoq driven by aggressive re-pricing of loans
Margins for the quarter were maintained at 2.8% on the back of healthy re-pricing of loan
book. Asset yields are the highest in the market with loan yields improving by 90 bps qoq to
11.6% while investment yields improving by 30 bps qoq to 8% (KS calc). Cost of deposits
increased by 70 bps qoq to 8.5% (also highest among banks). Going forward, we expect
Yes Bank to witness lower pressure on margins with interest rates closer to peak levels and
cost of deposits of Yes Bank reflecting the same. However, we remain conservative factoring
a 25 bps decline in NIMs for FY2012E.
Growth slows as focus shifts back to margins
Yes Bank saw a decline in loan book of 3.7% qoq to `331 bn (yoy growth healthy at 26%).
The bank has further increased exposure to SME/commercial loans (24% of loans compared
to 23% in March 2011) on the back of improved confidence in asset quality and better
pricing power.
Overall sub-segments in remained the same over the previous quarter: Food and agriculture
at 20%, infrastructure and engineering at 19% each and TMT at 10%. Telecom exposure
has reduced to 6% of loans from 23% in June 2010 largely due to runoff. We expect loan
growth to remain higher than industry average at about 32% CAGR for FY2011-13E. We
expect loan growth to get back to a higher multiple to industry average than what is
reported in the current quarter as interest rates start soften.
Deposit growth slows to 44% yoy; CASA improves 60 bps qoq to 10.9%
Deposits grew slowly by 44% yoy (5% qoq decline) compared to previous quarters, as the
bank was cautious on loan growth. However, despite a qoq de-growth in overall deposits,
CASA ratio improved only by 60 bps qoq to 10.9%. The management targets to reach
CASA ratio of industry average by FY2015E, which will be a big scale up from current levels.
Investments in new branches continued with the bank opening 41 branches in 1Q taking
the total branches to 255. However, in light of new regulations around branch expansion
which requires banks to open more branches in tier 5-6 cities to obtain licenses for urban
branches, we expect the focus shift towards branch productivity in the near term than
opening new branches. The management highlighted no change to their medium term
targets on branches in Version 2.0.
Fee income to assets declines to 1.1% of assets compared to 2% in FY2007-09
Trend on fee income continues to be under pressure with the contribution to overall assets
declining to about 1% levels from about 2% levels in FY2007-09. Performance on the retail
side was impressive with 44% yoy growth. However, financial markets and financial advisory
grew by 9% yoy. Transaction fee income grew by 22%, an area where we expected positive
surprises, given the investments made in acquiring new clients over the past two years. We
are building fee income to grow by 25% CAGR for FY2011-13E.
Other highlights for the quarter
Cost-income ratio for the quarter increased marginally to 37% from 35% in March 2011-
increase largely driven by the increase in staff costs. Staff expenses increased by 35% yoy.
Non staff expenses were flat qoq.
Tier-1 ratio for the quarter was at 9.6% and the bank has announced a capital raising
plan in the previous quarter to fund future growth. We currently are not factoring the
expected capital raising plans to our estimates, but expect this raising to be completed in
FY2012.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
YES Bank (YES)
Banks/Financial Institutions
Strong earnings, driven by lower provisions. Yes Bank reported strong 38%
earnings growth, driven by steady margins and lower provisions. Despite a high interest
rate environment, the bank has been able to maintain margins at 2.8%, which is
commendable, in our view. Branch openings have been strong over the last 6 months –
added 70 branches. However, CASA % at 10.9% remained weak this quarter despite a
slower balance sheet growth. Valuations are attractive at 2.4X book and 12X FY2012E
EPS for 20%+ RoE business. Increasing liability focus in its next leg of growth will be
crucial to sustain its high valuations. Retain BUY and TP of `420.
Impressive performance on net earnings, but weak show on CASA and fee income
Yes Bank’s 1QFY11 performance has been impressive, led by lower provisions on the back of a
decline in gross NPLs. Aggressive re-pricing has enabled margins to be maintained for the quarter.
With interest rates close to peak levels, we expect a more comfortable margin environment for the
bank. Though cost-income ratio has gone up marginally, it is still healthy at below 40% levels. The
bank has increased its workforce by 12% qoq, strengthening its front-end sales force.
However, we are somewhat disappointed by two key aspects and expect improvement over next
few quarters (1) CASA ratio improved by only 60 bps qoq despite de-growth in overall deposits. (2)
Fee income trends have been weaker, especially on transaction banking and financial advisory
resulting. Overall fee income to assets has declined to 1.1% from about 2% levels in FY2007-09.
We maintain our loan growth expectation for Yes Bank at 32% CAGR over FY2011-13E with
margins declining by about 25 bps yoy. Valuations at 2.4X book and 12X FY2012E EPS are
attractive for consistently returning high RoEs of about 20%. Retain BUY and target of `420
valuing the bank at 2.6X FY2013E book and 13X EPS.
Sequential decline of gross NPLs result in negligible provisions
Yes Bank reported another strong performance on asset quality with negligible slippages and
better recovery resulting in gross NPLs declining qoq. Gross NPLs are at 0.2% while net NPLs are at
0.01% of loans. Restructured asset are flat at `870mn (0.3% of loans). Write-back of provisions in
a fully provided account (recovered during the quarter) resulted in lower provisions. Asset quality
remains comfortable for the bank as of now, but given strong loan growth over last couple of
years, we expect gross NPL’s to rise to 0.8% by FY2012.
Margins maintained at 2.8% qoq driven by aggressive re-pricing of loans
Margins for the quarter were maintained at 2.8% on the back of healthy re-pricing of loan
book. Asset yields are the highest in the market with loan yields improving by 90 bps qoq to
11.6% while investment yields improving by 30 bps qoq to 8% (KS calc). Cost of deposits
increased by 70 bps qoq to 8.5% (also highest among banks). Going forward, we expect
Yes Bank to witness lower pressure on margins with interest rates closer to peak levels and
cost of deposits of Yes Bank reflecting the same. However, we remain conservative factoring
a 25 bps decline in NIMs for FY2012E.
Growth slows as focus shifts back to margins
Yes Bank saw a decline in loan book of 3.7% qoq to `331 bn (yoy growth healthy at 26%).
The bank has further increased exposure to SME/commercial loans (24% of loans compared
to 23% in March 2011) on the back of improved confidence in asset quality and better
pricing power.
Overall sub-segments in remained the same over the previous quarter: Food and agriculture
at 20%, infrastructure and engineering at 19% each and TMT at 10%. Telecom exposure
has reduced to 6% of loans from 23% in June 2010 largely due to runoff. We expect loan
growth to remain higher than industry average at about 32% CAGR for FY2011-13E. We
expect loan growth to get back to a higher multiple to industry average than what is
reported in the current quarter as interest rates start soften.
Deposit growth slows to 44% yoy; CASA improves 60 bps qoq to 10.9%
Deposits grew slowly by 44% yoy (5% qoq decline) compared to previous quarters, as the
bank was cautious on loan growth. However, despite a qoq de-growth in overall deposits,
CASA ratio improved only by 60 bps qoq to 10.9%. The management targets to reach
CASA ratio of industry average by FY2015E, which will be a big scale up from current levels.
Investments in new branches continued with the bank opening 41 branches in 1Q taking
the total branches to 255. However, in light of new regulations around branch expansion
which requires banks to open more branches in tier 5-6 cities to obtain licenses for urban
branches, we expect the focus shift towards branch productivity in the near term than
opening new branches. The management highlighted no change to their medium term
targets on branches in Version 2.0.
Fee income to assets declines to 1.1% of assets compared to 2% in FY2007-09
Trend on fee income continues to be under pressure with the contribution to overall assets
declining to about 1% levels from about 2% levels in FY2007-09. Performance on the retail
side was impressive with 44% yoy growth. However, financial markets and financial advisory
grew by 9% yoy. Transaction fee income grew by 22%, an area where we expected positive
surprises, given the investments made in acquiring new clients over the past two years. We
are building fee income to grow by 25% CAGR for FY2011-13E.
Other highlights for the quarter
Cost-income ratio for the quarter increased marginally to 37% from 35% in March 2011-
increase largely driven by the increase in staff costs. Staff expenses increased by 35% yoy.
Non staff expenses were flat qoq.
Tier-1 ratio for the quarter was at 9.6% and the bank has announced a capital raising
plan in the previous quarter to fund future growth. We currently are not factoring the
expected capital raising plans to our estimates, but expect this raising to be completed in
FY2012.
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