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Yes Bank has underperformed the BSE Bankex 3% since last July, despite record growth and
profitability in FY11. While we believe re-rating potential hinges on YES's ability to penetrate the
CASA deposits market, reasonable valuations and likely quicker NIM recovery as the rate cycle
peaks lead us to initiate at Buy.
FY05-11: so far, so good
In its seventh year of operation, Yes Bank (YES) expanded at a brisk pace, with an 89% asset
CAGR for FY05-11. Its ROE of 21.1% and ROA of 1.53% in FY11 are comparable to those of its
larger domestic private-sector peers due to: 1) a strong fee income profile (1.2% of assets) that
leverages the bank’s mid-market franchise; 2) a low operating cost structure (1.5% of assets) with
a wholesale business model; and 3) low credit costs (14bp of average loans).
Version 2.0: execution key to re-rating
By 2015, YES says it will: 1) treble its branch network (from 255 as of June 2011), treble its
employee base (from around 4,400 as of June 2011) and grow its ATM network 10-fold (261
currently); 2) raise its share of retail/branch banking loans from 12% to one-third, with overall
loans rising at a 31% CAGR; and 3) increase its low-cost deposits to 30% of the total (vs 10%
currently; ie a 68% CAGR). Despite this sizeable ramp-up, YES expects to improve ROE to 22-
24% and ROA to 1.5-1.75% over the period.
Likely equity dilution in CY11 – board sign-off for US$500m
Factoring in modest asset growth of 26% yoy in FY12 (vs 62% in FY11), we estimate YES will be
leveraged 16x in FY12 (vs its 13x five-year average). Tier-1 capital is likely to fall to 8.7% in
FY12F vs 9.1% in FY11. Assuming successful equity raising of US$500m (ie, 20% dilution) or a
more likely (in our view) US$250m (10%) in FY12, YES would trade at 2.1x and 2.3x FY12F postdilution
P/BV, respectively. Our estimates factor in no equity dilution.
Initiating coverage with a Buy rating and a target price of Rs405
Our Buy rating on YES is based on a combination of what we see as fair valuations (2.5x FY12F
P/BV; 2.3x post dilution) for a niche business model and likely quicker NIM recovery as the
interest rate cycle peaks. Our EVATM-based target price of Rs405 implies 23% upside potential
and a 3.1x FY12F P/BV (2.9x post dilution). Our FY12-14 estimates factor in a gradual
improvement in NIM, which is part offset by higher operating costs and higher provisions for bad
loans. We believe key to a re-rating is YES’s ability to improve ROAs as it enters the hypercompetitive
retail market.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Yes Bank has underperformed the BSE Bankex 3% since last July, despite record growth and
profitability in FY11. While we believe re-rating potential hinges on YES's ability to penetrate the
CASA deposits market, reasonable valuations and likely quicker NIM recovery as the rate cycle
peaks lead us to initiate at Buy.
FY05-11: so far, so good
In its seventh year of operation, Yes Bank (YES) expanded at a brisk pace, with an 89% asset
CAGR for FY05-11. Its ROE of 21.1% and ROA of 1.53% in FY11 are comparable to those of its
larger domestic private-sector peers due to: 1) a strong fee income profile (1.2% of assets) that
leverages the bank’s mid-market franchise; 2) a low operating cost structure (1.5% of assets) with
a wholesale business model; and 3) low credit costs (14bp of average loans).
Version 2.0: execution key to re-rating
By 2015, YES says it will: 1) treble its branch network (from 255 as of June 2011), treble its
employee base (from around 4,400 as of June 2011) and grow its ATM network 10-fold (261
currently); 2) raise its share of retail/branch banking loans from 12% to one-third, with overall
loans rising at a 31% CAGR; and 3) increase its low-cost deposits to 30% of the total (vs 10%
currently; ie a 68% CAGR). Despite this sizeable ramp-up, YES expects to improve ROE to 22-
24% and ROA to 1.5-1.75% over the period.
Likely equity dilution in CY11 – board sign-off for US$500m
Factoring in modest asset growth of 26% yoy in FY12 (vs 62% in FY11), we estimate YES will be
leveraged 16x in FY12 (vs its 13x five-year average). Tier-1 capital is likely to fall to 8.7% in
FY12F vs 9.1% in FY11. Assuming successful equity raising of US$500m (ie, 20% dilution) or a
more likely (in our view) US$250m (10%) in FY12, YES would trade at 2.1x and 2.3x FY12F postdilution
P/BV, respectively. Our estimates factor in no equity dilution.
Initiating coverage with a Buy rating and a target price of Rs405
Our Buy rating on YES is based on a combination of what we see as fair valuations (2.5x FY12F
P/BV; 2.3x post dilution) for a niche business model and likely quicker NIM recovery as the
interest rate cycle peaks. Our EVATM-based target price of Rs405 implies 23% upside potential
and a 3.1x FY12F P/BV (2.9x post dilution). Our FY12-14 estimates factor in a gradual
improvement in NIM, which is part offset by higher operating costs and higher provisions for bad
loans. We believe key to a re-rating is YES’s ability to improve ROAs as it enters the hypercompetitive
retail market.
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